Aghion Philippe, Algan Yann, Cahuc Pierre. In: Journal of the European Economic Association, Volume 9, Issue 1, February 2011, Pages 3–42.


In a cross-section of countries, state regulation of labor markets is negatively correlated with the quality of labor relations. In this paper, we argue that these facts reflect different ways of regulating labor markets, either through the state or through the civil society, depending on the degree of cooperation in the economy. We rationalize these facts with a model of learning of the quality of labor relations. Distrustful labor relations lead to low unionization and high demand for direct state regulation of wages. In turn, state regulation crowds out the possibility for workers to experiment negotiation and learn about the potential cooperative nature of labor relations. This crowding out effect can give rise to multiple equilibria: a “good” equilibrium characterized by cooperative labor relations and high union density, leading to low state regulation; and a “bad” equilibrium, characterized by distrustful labor relations, low union density, and strong state regulation of the minimum wage.