Low-wage labor markets amd the power of suggestion

Natalya Shelkova ()

No 1112, Working Papers from Princeton University, Department of Economics, Industrial Relations Section.

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.

Keywords: minimum wage; low-wage markets; collusion; tacit collusion; focal points; monopsony papers (search for similar items in EconPapers)
JEL-codes: J31 J38 J42 L10 (search for similar items in EconPapers)
Date: 2008-12
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Related works:
Journal Article: Low-Wage Labor Markets and the Power of Suggestion (2015)
Working Paper: Low-Wage Labor Markets and the Power of Suggestion (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:indrel:542

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