Institutional Economics and the Minimum Wage: Broadening the Theoretical and Policy Debate
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. The purpose of this paper is, first, to suggest that this perspective is too narrow and, second, to use principles and concepts of institutional economics to demonstrate why. In particular, I use institutional theory to develop four theoretical rationales for minimum wage legislation: imperfect competition and inequality of bargaining power; involuntary unemployment and destructive competition; efficiency and growth; and 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.