NEOCLASSICAL EXPLOITATION: A BARGAINING MODEL WITH HETEROGENEOUS FIRMS AND WORKERS

Abstract

The idiosyncratic imperfections of labor markets have been widely discussed in the literature. These unique features affect policy outcomes and effectiveness depending on the structure of the markets. This thesis investigates the effectiveness of minimum wage policy in labor markets where heterogeneity, exploitation, monopsony, and informality exist. The effects of the policy are analyzed with a bargaining model that includes these features. The first experiment shows that, when implemented alone, the minimum wage increase failed to increase wages but led to higher informality and exploitation. The second experiment consists of policies combining the minimum wage increase with stricter sanctions against informality. Although this policy set reduced informality, it also caused wages to fall and significantly increased the rate of exploitation of formal workers. In the third experiment, workers' bargaining power was increased in addition to the policies in the previous policy set. It leads to a decline in informality, an increase in wages, a slight increase in average exploitation of formal workers, but a decrease in the proportion of workers exploited. These findings highlight the importance of a multi-layered policy design for the minimum wage policy to be effective in a labor market where heterogeneity, exploitation, monopsony, and informality exist.