Low-Wage Labor Markets and the Power of Suggestion

Natalya Shelkova ()

No 2008-33, Working papers from University of Connecticut, Department of Economics

Abstract: Low-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.

Keywords: minimum wage; low-wage markets; collusion; tacit collusion; focal points (search for similar items in EconPapers)
JEL-codes: J31 J38 J42 L10 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2008-09, Revised 2008-12
New Economics Papers: this item is included in nep-bec and nep-lab
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.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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https://media.economics.uconn.edu/working/2008-33r.pdf Full text (revised version) (application/pdf)
https://media.economics.uconn.edu/working/2008-33.pdf Full text (original version) (application/pdf)

Related works:
Journal Article: Low-Wage Labor Markets and the Power of Suggestion (2015)
Working Paper: Low-wage labor markets amd the power of suggestion (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2008-33

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