26 Pages Posted: 9 Oct 2014 Last revised: 12 Jul 2018

Date Written: June 27, 2018

Abstract

Real wages in U.S. retail sectors exhibit years of stickiness around minimum wage, where only recently retailers have started raising wages. The paper provides a theoretical explanation for this long-term wage stickiness by exploring the possibility that firms may tacitly collude on paying the legal minimum wage. We find that firms start deviating from paying minimum wage after the gap between the competitive wage and minimum wage exceeds a certain level. Our findings do not necessarily imply that minimum wage is harmful. They only imply that low minimum wage may be holding wages down.