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Noncompliance and the Effects of the Minimum Wage on Hours and Welfare in Competitive Labor Markets

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  • Danziger, Leif

    ()
    (Ben Gurion University)

Abstract

This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours and welfare are invariant to the minimum wage rate. If workers are risk averse and imprudent (which is the empirically likely case), then working hours decrease with the minimum wage rate, while their welfare may increase.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4408.

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Length: 22 pages
Date of creation: Sep 2009
Date of revision:
Publication status: published in: Labour Economics, 2009, 16 (6), 625-630
Handle: RePEc:iza:izadps:dp4408

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Keywords: competitive labor markets; noncompliance; minimum wage; working hours; welfare;

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References

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  1. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
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  5. Chang, Yang-Ming & Ehrlich, Isaac, 1985. "On the Economics of Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(1), pages 84-91, February.
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  8. 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.
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  15. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings Uncertainty and Precautionary Saving," CEPR Discussion Papers, C.E.P.R. Discussion Papers 699, C.E.P.R. Discussion Papers.
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  22. repec:ebl:ecbull:v:10:y:2004:i:9:p:1-7 is not listed on IDEAS
  23. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  24. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 135, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Eliav Danziger & Leif Danziger, 2014. "A Pareto-Improving Minimum Wage," CESifo Working Paper Series 4762, CESifo Group Munich.
  2. Leif Danziger, 2009. "Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms," CESifo Working Paper Series 2740, CESifo Group Munich.
  3. Baumann, Florian & Friehe, Tim, 2012. "On the evasion of employment protection legislation," Labour Economics, Elsevier, Elsevier, vol. 19(1), pages 9-17.
  4. Danziger, Eliav & Danziger, Leif, 2014. "A Pareto-Improving Minimum Wage," IZA Discussion Papers 8123, Institute for the Study of Labor (IZA).

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