Can Policy Interact with Culture? Minimum Wage and the Quality of Labor Relations

Abstract

Can public policy interfere with culture, such as beliefs and norms of cooperation? We\ninvestigate his question by evaluating the interactions between the State and the Civil\nSociety, focusing on the labor market. International data shows a negative correlation\nbetween union density and the quality of labor relations on one hand, and state regulation of\nthe minimum wage on the other hand. To explain this relation, we develop a model of\nlearning of the quality of labor relations. State regulation crowds out the possibility for\nworkers to experiment negotiation and learn about the true cooperative nature of participants\nin the labor market. This crowding out effect can give rise to multiple equilibria: a “good”\nequilibrium characterized by strong beliefs in cooperation, leading to high union density and\nlow state regulation; and a “bad” equilibrium, characterized by distrustful labor relations, low\nunion density and strong state regulation of the minimum wage. We then use surveys on\nsocial attitudes and unionization behavior to document the relation between minimum wage\nlegislation and the beliefs about the scope of cooperation in the labor market.

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