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Understanding "Wage Theft": Evasion and Avoidance Responses to Minimum Wage Increases

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  • Clemens, Jeffrey

    (University of California, San Diego)

  • Strain, Michael R.

    (American Enterprise Institute for Public Policy Research)

Abstract

A holistic assessment of the labor market effects of minimum wage regulation requires understanding employer compliance. The economics literature has paid little attention to this issue. We investigate how minimum wage increases and the strength of enforcement regimes affect the prevalence of subminimum wage payments. We find strong evidence that higher minimum wages lead to a greater prevalence of subminimum wage payments. We consistently estimate that increases in measured underpayment following minimum wage increases average between 10 and 25 percent of realized wage gains. We interpret this as evidence that minimum wage evasion and avoidance are an important reality in the low-wage labor market. Finally, we find that enforcement regimes play an important role in shaping both baseline compliance rates and the response of compliance to increases in minimum wages.

Suggested Citation

  • Clemens, Jeffrey & Strain, Michael R., 2019. "Understanding "Wage Theft": Evasion and Avoidance Responses to Minimum Wage Increases," IZA Discussion Papers 12167, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12167
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    Cited by:

    1. Jeffrey Clemens & Michael R. Strain, 2020. "Public Policy and Participation in Political Interest Groups: An Analysis of Minimum Wages, Labor Unions, and Effective Advocacy," NBER Working Papers 27902, National Bureau of Economic Research, Inc.
    2. Jeffrey Clemens, 2021. "How Do Firms Respond to Minimum Wage Increases? Understanding the Relevance of Non-employment Margins," Journal of Economic Perspectives, American Economic Association, vol. 35(1), pages 51-72, Winter.
    3. Gavoille, Nicolas & Zasova, Anna, 2023. "What we pay in the shadows: Labor tax evasion, minimum wage hike and employment," Journal of Public Economics, Elsevier, vol. 228(C).
    4. Jeffrey Clemens & Michael R. Strain, 2023. "How important are minimum wage increases in increasing the wages of minimum wage workers?," Contemporary Economic Policy, Western Economic Association International, vol. 41(4), pages 594-612, October.
    5. Hyejin Ku, 2022. "Does Minimum Wage Increase Labor Productivity? Evidence from Piece Rate Workers," Journal of Labor Economics, University of Chicago Press, vol. 40(2), pages 325-359.
    6. Ronconi, Lucas & Raphael, Steven, 2024. "Measuring Effective Labor Regulation in the Less Developed World: Recent Advances and Challenges Ahead," IZA Policy Papers 210, Institute of Labor Economics (IZA).
    7. Michael R. Strain, 2021. "An Argument Against The $15 Minimum Wage," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 40(4), pages 1289-1297, September.
    8. Clemens, Jeffrey & Strain, Michael R., 2022. "Does measurement error explain the increase in subminimum wage payment following minimum wage increases?," Economics Letters, Elsevier, vol. 217(C).
    9. Nicolas Gavoille & Anna Zasova, 2021. "What we pay in the shadow: Labor tax evasion, minimum wage hike and employment," Working Papers CEB 21-017, ULB -- Universite Libre de Bruxelles.
    10. Jonathan Meer & Hedieh Tajali, 2023. "Effects of the Minimum Wage on the Nonprofit Sector," NBER Working Papers 31281, National Bureau of Economic Research, Inc.
    11. Badaoui, Eliane & Walsh, Frank, 2022. "Productivity, non-compliance and the minimum wage," Journal of Development Economics, Elsevier, vol. 155(C).
    12. Koch, Andreas & Kirchmann, Andrea & Reiner, Marcel & Scheu, Tobias & Zühlke, Anne & Bonin, Holger, 2020. "Verhaltensmuster von Betrieben und Beschäftigten im Kontext des gesetzlichen Mindestlohns," IZA Research Reports 97, Institute of Labor Economics (IZA).
    13. Kashif Mansoor & Donal O'Neill, 2020. "Minimum Wage Compliance and Household Welfare: An analysis of over 1500 Minimum Wages," Economics Department Working Paper Series n301-20.pdf, Department of Economics, National University of Ireland - Maynooth.
    14. Amanda M. Grittner & Matthew S. Johnson, 2021. "When Labor Enforcement and Immigration Enforcement Collide: Deterring Worker Complaints Worsens Workplace Safety," Upjohn Working Papers 21-353, W.E. Upjohn Institute for Employment Research.
    15. Clemens, Jeffrey & Strain, Michael R., 2023. "Does Wage Theft Vary by Demographic Group? Evidence from Minimum Wage Increases," IZA Discussion Papers 16550, Institute of Labor Economics (IZA).
    16. Goerke, Laszlo & Pannenberg, Markus, 2023. "Minimum Wage Non-compliance: The Role of Co-determination," IZA Discussion Papers 16621, Institute of Labor Economics (IZA).
    17. Neumark, David & Munguía Corella, Luis Felipe, 2021. "Do minimum wages reduce employment in developing countries? A survey and exploration of conflicting evidence," World Development, Elsevier, vol. 137(C).
    18. repec:aei:rpaper:1008580847 is not listed on IDEAS
    19. Mansoor, Kashif & O'Neill, Donal, 2021. "Minimum wage compliance and household welfare: An analysis of over 1500 minimum wages in India," World Development, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    minimum wage; subminimum wage; compliance; noncompliance; enforcement;
    All these keywords.

    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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