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

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  • Basu, Arnab K.
  • Chau, Nancy H.
  • Kanbur, Ravi

Abstract

In many countries, the authorities turn a blind eye to minimum wage laws that they have themselves passed. But if they are not going to enforce a minimum wage, why have one? Or if a high minimum wage is not going to be enforced one hundred percent, why not have a lower one in the first place? Can economists make sense of such phenomena? This paper argues that we can, if a high official minimum wage acts as a credible signal of commitment to stronger enforcement of minimum wage laws. We demonstrate this as an equilibrium phenomenon in a model of a monopsonistic labor market in which enforcement is costly, and the government cannot pre-commit to enforcement intensity. In this setting we also demonstrate the paradoxical result that a government whose objective function gives greater weight to efficiency relative to distributional concerns may end up with an outcome that is less efficient. We conclude by suggesting that the explanations offered in this paper may apply to a broad range of phenomena where regulations are imperfectly enforced.

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Bibliographic Info

Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127081.

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Date of creation: 2005
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Handle: RePEc:ags:cudawp:127081

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Related research

Keywords: minimum wage; dynamic consistency; non-compliance; equity and efficiency; Labor and Human Capital; D6; E61; J38;

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References

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  11. 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).
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  25. Gindling, T. H. & Terrell, Katherine, 2004. "Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica," IZA Discussion Papers 1018, Institute for the Study of Labor (IZA).
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Cited by:
  1. Danziger, Leif, 2010. "Endogenous monopsony and the perverse effect of the minimum wage in small firms," Labour Economics, Elsevier, vol. 17(1), pages 224-229, January.
  2. 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).
  3. 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.
  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. Baumann, Florian & Friehe, Tim, 2012. "On the evasion of employment protection legislation," Labour Economics, Elsevier, vol. 19(1), pages 9-17.
  6. 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.

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