Wage Fixing

We model and analyze employer cartels that fix wages by committing to a wage ceiling. The setting is a frictional labor market with large employers that compete for workers via posted wages. Wage fixing reduces competition both inside and outside the cartel, leading to market-wide wage depression. Competition from outside employers disciplines the cartel and hence governs its wage impact and profitability. Consequently, wage-fixing schemes are more likely to emerge and remain stable when the labor market has slack, concentration is high, the span of control is small, product demand is elastic, and firms also collude in the product market. We describe a simple sufficient statistic to gauge the harm caused by a wage-fixing cartel.