A Supply Side Rationale for Wage Floors: Evidence on Worker Collusion

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Abstract This research project will use field experiments to investigate why people do not accept job offers at below "market wages" even when unemployment rates are very high and labor union presence is either weak or non-existent. Economic theory suggests that high unemployment rates should lead to lower wages and induce people to accept job offers at these lower wages. In practice, this does not happen either in the developed world or developing world. The inability of labor markets to automatically adjust to high unemployment rates may be one of the reasons why small fluctuations in economic activity lead to serious depressions. The experiments will be conducted in rural India where there is no labor union presence, and informal pressure may be the only reason why workers may not to take jobs offered below "market wages". The results of this research will provide us with a better understanding of how labor market, especially at the lower skill level, functions and thus provide policy makers options to craft better policies to reduce unemployment in the U.S. and around the globe. The results will thus improve the competitiveness of the US economy as well as reduce poverty. This research project will use field experiments in 350 Indian villages to study how informal group sanctions can reduce the willingness to accept job offers below the market wage. These informal sanctions may function as labor unions do to generate downward wage rigidities and reduce employment. The experiments are designed to provide employment to workers at below market wages during the "lean" season when unemployment is high. Some job offers will be made in "public" so that co-villagers are aware of the low wage offer while some offers are made in private. In addition to the field experiments, the study will also examine whether participants are willing to give away money from their own endowments to reduce the amount received by other workers who have accepted work at below market wages. The results of a pilot study strongly suggest that informal sanctions can explain wage frictions in low income communities, even in the absence of labor unions. The results of this research project will help us better understand the functioning of labor markets in low income communities, something that has eluded economists for a long time. The results will also guide policy makers in crafting more efficient policies in reducing unemployment, poverty, and making economies more productive and competitive.