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The Political Economy of the “Minimum‐Wage Institution” in an Internationally Integrated Market

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  • Emmanuel Petrakis
  • Minas Vlassis

Abstract

The paper explores the political economy of the “minimum‐wage institution (MWI)” in an internationally integrated product market. The authors consider a two‐sector Economic Union (EU) with a perfectly competitive agricultural sector and a unionized oligopolistic manufacturing sector in which there exist productivity asymmetries across firms. It is shown that efficient firms have an incentive to strategically opt for intercountry minimum‐wage agreements high enough to raise their inefficient rivals’ costs and thus gain business in equilibrium. The unions of workers in all countries also find these agreements in their best interest. As a consequence, the MWI may emerge as the equilibrium institutional resolution of alternative political processes (i.e., an EU‐wide referendum or special‐interest politics), despite its negative effect on aggregate employment.

Suggested Citation

  • Emmanuel Petrakis & Minas Vlassis, 2004. "The Political Economy of the “Minimum‐Wage Institution” in an Internationally Integrated Market," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 27-40, February.
    • Handle: RePEc:bla:reviec:v:12:y:2004:i:1:p:27-40
    DOI: 10.1111/j.1467-9396.2004.00429.x
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    References listed on IDEAS

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    1. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659, Elsevier.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    3. Alison Booth, 2012. "The Economic Behavior of Trade Unions," CEPR Discussion Papers 670, Centre for Economic Policy Research, Research School of Economics, Australian National University.
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    Cited by:

    1. Kraft, Kornelius & Rammer,Christian & Gottschalk, Sandra, 2012. "Minimum wages and competition: The case of the German roofing sector," ZEW Discussion Papers 12-083, ZEW - Leibniz Centre for European Economic Research.

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