Labor Market Middlemen and the Minimum Wage as Collective Bargaining
13 Pages Posted: 7 Jun 2016
Date Written: June 6, 2016
Why does the minimum wage exist? While the literature on the effects of the minimum wage is large, comparatively little has been written as to why the minimum wage exists. In this paper, I present a theory of labor market middlemen. I show that if the costs of negotiation are fixed, only those negotiating over a large surplus will employ a middleman. Unions can arise if the fixed cost can be sufficiently spread across workers. Nonetheless, for a sufficiently small surplus and/or a sufficiently large bargaining cost, even unionization might be infeasible. As a result, workers can use the political process as a substitute for collective bargaining. In fact, if all workers widely understand the bargaining process, they are likely to see the minimum wage as an issue of fairness (i.e. low wage workers do not have the same bargaining opportunities as those bargaining over a larger surplus). This could potentially explain popular support for minimum wages. This conclusion is consistent with existing empirical work on the determination of the minimum wage.
Keywords: minimum wage, unions, middleman
JEL Classification: J52, D23, E24
Suggested Citation: Suggested Citation