Institutional Economics and the Minimum Wage: Broadening the Theoretical and Policy Debate

Abstract

Debate among labor economists on the pros and cons of a minimum wage law has come to focus on whether labor markets are competitive or monopsonistic. Using principles and concepts of institutional economics, the author argues that this perspective on minimum wages is too narrow. In particular, he uses institutional theory to develop four theoretical rationales for minimum wage legislation: setting a floor on wages may serve to countervail imperfect competition and inequality of bargaining power; help achieve macroeconomic stabilization and full employment; promote long-term efficiency and growth; and offset labor market externalities and social costs of labor. One revisionist implication is that a minimum wage under plausible conditions may increase economic efficiency even in a purely competitive labor market.

Keywords: Minimum Wage, Institutional Economics

JEL Classification: J30,E24