Richard Lester's Institutional‐Industrial Relations Model of Labor Markets and the Near‐Zero Minimum Wage Employment Effect: The Model Card and Krueger Ignored but Shouldn't Have

Abstract

David Card and Alan Krueger dedicate their minimum wage book Myth and Measurement (1995) to Richard Lester, an institutional‐industrial relations labor economist and key figure in the marginalist controversy of the 1940s. Lester claimed a minimum wage law's employment effect is likely zero or near‐zero, the same as Card and Krueger found a half‐century later, but they did not follow Lester's theoretical explanation and instead advanced a marginalist dynamic monopsony model. Numerous empirical studies have followed, with substantial evidence pointing to a relatively small and perhaps zero employment effect, but existing theoretical models, such as competitive, search, and monopsony, remain unable to provide a satisfactory explanation. Hence, to advance the minimum wage research program this article synthesizes and formalizes from Lester's writings an alternative institutionalist model of labor markets, represented in a set of five diagrams. The model provides considerable new insight and explanation for a zero/near‐zero employment effect, anchored on lack of a well‐defined labor demand curve, alternative cost‐absorbing managerial actions, and aggregate demand effect.