Theory of Collusion in the Labor Market

Posted by D. Daniel Sokol

Pedro Gonzaga (Faculdade de Economia da Universidade do Porto), Antonio Brandao (Faculdade de Economia da Universidade do Porto) and Helder Vasconcelos (Faculdade de Economia da Universidade do Porto) offer Theory of Collusion in the Labor Market.

ABSTRACT: Despite the major concern of the competition authority to forbid and prosecute formal cartels who cooperatively fix prices, limit production or divide markets, there seems to be little regulation and investigation of collusive practices in the labor market. For that reason, this article analyzes the economic effects of cooperative wage fixing in industries that use one type of labor as the only input, while the other assumptions are kept as general as possible. Under the one input assumption it was found that collusion in the labor market and collusion in the product market have exactly the same results, which include the rise in prices and the fall in output, employment and wages. The higher prices and lower wages in cartelized industries are not only associated with the elimination of the well known business stealing effect, but also with the elimination of the labor force stealing effect. The conclusions in this paper! can be generalized to industries that use more than one input, as long as the cartel is able to fix the prices of all the inputs.