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

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Author Info
Basu, Arnab K
Chau, Nancy H
Kanbur, Ravi

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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 labour 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5107.

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Date of creation: Jun 2005
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Handle: RePEc:cpr:ceprdp:5107

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Related research
Keywords: dynamic consistency; equity and efficiency; minimum wage; non-complience;

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Find related papers by JEL classification:
D60 - Microeconomics - - Welfare Economics - - - General
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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    Other versions:
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  14. Basu, Arnab K & Chau, Nancy H & Kanbur, Ravi, 2006. "A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns," CEPR Discussion Papers 5784, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Strobl, Eric & Walsh, Frank, 2003. "Minimum Wages and Compliance: The Case of Trinidad and Tobago," Economic Development and Cultural Change, University of Chicago Press, vol. 51(2), pages 427-50, January.
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