Low-Wage Labor Markets and the Power of Suggestion
AbstractLow-wage labor markets are traditionally viewed as competitive, and the possibility of strategic behavior by employers is dismissed. However, such behavior is not impossible. This paper investigates the possibility of tacit collusion by low-wage employers while setting wages. A game-theoretic explanation along the lines of the Folk theorem is offered, suggesting that a non-binding minimum wage may serve as a focal point for tacit collusion, proposing a symmetric solution to an infinitely played game of wage-setting. Several empirical techniques were employed in testing the hypothesis, including hurdle models of collusion. CPS monthly data is used for the years 1990-2005, covering the last four federal minimum wage increases. The likelihood of collusion at minimum wage is evaluated, as well as its dynamics during this period. The results generally support the collusion hypothesis and suggest that employers respond strategically to changes in minimum wage legislation while using the statutory minimum wage as a coordination tool in tacit collusion.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2008-33.
Length: 48 pages
Date of creation: Sep 2008
Date of revision: Dec 2008
Note: I thank my adviser Christian Zimmermann for advice and support; professors Alpert, Couch, Dharmapala and Furtado for their discussions and comments; participants of the 2008 IRS Sundance Conference on Monopsony, particularly David Card, 2008 SOLE meetings, 10th IZA Summer School in Labor Economics, and UConn brownbag seminars for their input. All remaining mistakes are my own.
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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
More information through EDIRC
minimum wage; low-wage markets; collusion; tacit collusion; focal points;
Other versions of this item:
- Natalya Y. Shelkova, 2008. "Low-wage labor markets amd the power of suggestion," Working Papers 1112, Princeton University, Department of Economics, Industrial Relations Section..
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-29 (All new papers)
- NEP-BEC-2008-09-29 (Business Economics)
- NEP-LAB-2008-09-29 (Labour Economics)
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