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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.

    ()
    (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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References

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Citations

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Cited by:
  1. Leif Danziger, 2009. "Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms," CESifo Working Paper Series 2740, CESifo Group Munich.
  2. 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.
  3. Basu, Arnab K. & Chau, Nancy H. & Kanbur, Ravi, 2009. "A theory of employment guarantees: Contestability, credibility and distributional concerns," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 482-497, April.
  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. 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.
  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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