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

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  • Basu, Arnab K.

    ()
    (Cornell University)

  • Chau, Nancy

    ()
    (Cornell University)

  • Kanbur, Ravi

    ()
    (Cornell University)

Abstract

In many countries, non-compliance with minimum wage legislation is widespread, and authorities may be seen as having turned a blind eye to a legislation that they have themselves passed. But if enforcement is imperfect, how effective can a minimum wage be? And if non-compliance is widespread, why not revise the minimum wage? This paper examines a minimum wage policy in a model with imperfect competition, imperfect enforcement and imperfect commitment, and argues that it is the combination of all three that produces results which are consistent with a wide range of stylized facts that would otherwise be difficult to explain within a single framework. We demonstrate that turning a blind eye can indeed be an equilibrium phenomenon with rational expectations subject to an ex post credibility constraint. Since credible enforcement requires in effect a credible promise to execute ex post a costly transfer of income from employers to workers, a government with an objective function giving full weight to efficiency but none to distribution is shown, paradoxically, to be unable to credibly elicit efficiency improvements via a minimum wage reform.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2998.

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Length: 37 pages
Date of creation: Aug 2007
Date of revision:
Publication status: published in: Economic Journal, 2010, 120 (543), 244 - 269
Handle: RePEc:iza:izadps:dp2998

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Keywords: dynamic consistency; minimum wage; non-compliance; equity and efficiency;

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Citations

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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, Elsevier, vol. 17(1), pages 224-229, January.
  2. Taryn Dinkelman & Vimal Ranchhod, 2010. "Evidence on the impact of minimum wage laws in an informal sector: Domestic workers in South Africa," SALDRU Working Papers, Southern Africa Labour and Development Research Unit, University of Cape Town 44, Southern Africa Labour and Development Research Unit, University of Cape Town.
  3. Basu, Arnab K. & Chau, Nancy H. & Kanbur, Ravi, 2006. "A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns," Working Papers, Cornell University, Department of Applied Economics and Management 127048, Cornell University, Department of Applied Economics and Management.
  4. Baumann, Florian & Friehe, Tim, 2012. "On the evasion of employment protection legislation," Labour Economics, Elsevier, Elsevier, vol. 19(1), pages 9-17.
  5. 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).
  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, Cornell University, Department of Applied Economics and Management 128865, Cornell University, Department of Applied Economics and Management.

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