Low-wage labor markets are traditionally viewed as competitive,
and the possibility of strategic behavior by employers is dismissed.
However, such behavior is not impossible. This paper investigates the
possibility of tacit collusion by low-wage employers while setting wages.
A game-theoretic explanation along the lines of the Folk theorem is offered,
suggesting that a non-binding minimum wage may serve as a
focal point for tacit collusion, proposing a symmetric solution to an
infinitely played game of wage-setting. Several empirical techniques
were employed in testing the hypothesis, including hurdle models of
collusion. CPS monthly data is used for the years 1990-2005, covering
the last four federal minimum wage increases. The likelihood of collusion
at minimum wage is evaluated, as well as its dynamics during
this period. The results generally support the collusion hypothesis and
suggest that employers respond strategically to changes in minimum
wage legislation while using the statutory minimum wage as a coordination
tool in tacit collusion.