Do employers collaborate on labour markets to lower wages? A new study by assistant professor International Economics Vincent Delabastita and Michael Rubens (University of California, Los Angeles) sheds light on this question by illustrating how secret agreements between employers in the past suppressed workers' wages and employment.
New research method
Using detailed data from 227 Belgian coal companies between 1845 and 1913, the researchers developed a novel method to track how wages were set based on production costs and output, without needing direct evidence of collusion. The researchers found that this price reduction grew slowly before 1900 and could be explained by normal market factors (such as limited competition or friction in hiring). However, after 1900, wage cuts suddenly increased much more sharply.
Influence of the Liège coal cartel
This study links this sharp wage cut to the Liège coal cartel of 1897, which coordinated coal production among large producers and controlled 75% of the market. After the cartel was formed, employers systematically paid their employees even less in relation to the value they created. After the cartel was established, Delabastita and Rubens found clear evidence that collusive agreements alone caused wages to fall further. Both wages and employment fell by 6% to 17% compared to pre-cartel levels – and by up to 25% compared to a hypothetical market without any collusion.
Application modern labour practices
The findings challenge conventional assumptions in labour economics, which often overlook the impact of collusive agreements between employers. Delabastita and Rubens argue that their method can also be applied to modern labour practices, where this type of behaviour is difficult to observe directly. Being able to trace collusive behaviour can thus have important implications for policy and enforcement of fair-competition regulations.