Title

Low-wage labor markets amd the power of suggestion

Author(s)

Natalya Y. Shelkova Natalya Shelkova (University of Connecticut)

Abstract

Low-wage 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 theorm is offered, suggesting that a non-binding minimum wage may serve as a focal point of 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.

Creation Date

2008-12

Section URL ID

IRS

Paper Number

542

URL

https://dataspace.princeton.edu/bitstream/88435/dsp01j38606940/1/542.pdf

File Function

Jel

J31, J38, J42, L10

Keyword(s)

minimum wage, low-wage markets, collusion, tacit collusion, focal points, monopsony papers

Suppress

false

Series

1