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Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws

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  • ArnabK. Basu
  • NancyH. Chau
  • Ravi Kanbur

Abstract

In many countries, non-compliance with minimum wage legislation is widespread and authorities may be seen as having turned a blind eye to legislation they have themselves passed. We show that turning a blind eye can indeed be an equilibrium phenomenon with "ex post" credibility, in a model of minimum wage policy with imperfect competition, imperfect enforcement and imperfect commitment. Since credible enforcement requires costly "ex post" transfer of income from employers to workers, a government concerned only with efficiency but not with distribution is shown, paradoxically, to be unable to credibly elicit efficiency improvements via a minimum wage reform. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 543 (03)
Pages: 244-269

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:543:p:244-269

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  1. Basu, Arnab K. & Chau, Nancy H. & Kanbur, Ravi, 2006. "A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns," Working Papers 127048, Cornell University, Department of Applied Economics and Management.
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Cited by:
  1. Dinkelman, Taryn & Ranchhod, Vimal, 2012. "Evidence on the impact of minimum wage laws in an informal sector: Domestic workers in South Africa," Journal of Development Economics, Elsevier, vol. 99(1), pages 27-45.
  2. Danziger, Leif, 2009. "Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms," IZA Discussion Papers 4320, Institute for the Study of Labor (IZA).
  3. Bali, Namrata & Chen, Martha Alter & Kanbur, Ravi, 2012. "THE CORNELL-SEWA-WIEGO Exposure and Dialogue Programme: An Overview of the Process and Main Outcomes," Working Papers 128865, Cornell University, Department of Applied Economics and Management.
  4. Basu, Arnab K. & Chau, Nancy & Siddique, Zahra, 2011. "Tax Evasion, Minimum Wage Non-Compliance and Informality," IZA Discussion Papers 6228, Institute for the Study of Labor (IZA).
  5. Basu, Arnab K. & Chau, Nancy & Kanbur, Ravi, 2007. "A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns," IZA Discussion Papers 3002, Institute for the Study of Labor (IZA).
  6. Baumann, Florian & Friehe, Tim, 2012. "On the evasion of employment protection legislation," Labour Economics, Elsevier, vol. 19(1), pages 9-17.

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