Minimum wage and low-wage labor markets

Date of Completion

January 2009


Economics, General|Economics, Labor|Economics, Theory




Low-wage labor markets are traditionally viewed as competitive and the possibility of non-competitive behavior by employers is dismissed. This dissertation consists of three chapters linked by the common purpose of studying the possibility of collusive behavior by employers at the minimum wage.^ The first chapter is an empirical study investigating the possibility of tacit collusion by low-wage employers at a non-binding minimum wage that serves as a focal point. It offers a simple game-theoretic explanation to the possibility of collusion and uses monthly CPS data (1990 2005) in testing the collusion hypothesis. The likelihood of collusion at the minimum wage and its dynamics, as well as its responsiveness to the facilitating factors are evaluated. The results generally support the hypothesis and suggest that employers respond strategically to changes in the minimum wage legislation. ^ The second chapter attempts to reconcile the two empirical phenomena, the minimum wage spike and wage dispersion, while attributing the former to the collusive behavior of employers in the low-wage sectors with established minimum wage. The chapter builds a theoretical search modal with wage-posting, urn-ball matching and firm productive heterogeneity. A non-degenerate minimum wage spike and wage dispersion an obtained when the firm wage determination embodies both incentives for collusion and competition, making the spike and dispersion the outcomes of a partially collusive equilibrium. Besides this main result, the paper also shows that a higher minimum wage may reduce unemployment. ^ The third chapter extends the model of the second chapter by examining unemployment dynamics through the lens of a wage-posting model with two sectors and two types of workers. The model assumptions include collusion at a non-binding minimum wage, costly entry and intersectoral labor mobility. Model simulations demonstrate that collusion at a non-binding minimum wage induces entry into the low-wage sector. This dampens the overall negative employment impact of economic downturns. The excess of low-wage vacancies has shown not only to secure low unemployment rates for the low-skilled workers, but also to provide employment opportunities for the high-skilled when their industries substantially decline.^