Turning a ‘Blind Eye’? Compliance with Minimum Wage Standards and Employment

Turning a ‘blind eye’ to non‐compliance with minimum wage standards is sometimes presented as a pragmatic way to accommodate higher wages while not harming employment opportunities for workers employed in marginal firms. In this paper, we model firms' wage and employment decisions, and show that there may be a trade‐off between non‐compliance and employment. The main predictions of the model are tested empirically using data from the Italian labour force survey. We find evidence of a positive employment non‐compliance effect, though elasticities are smaller than typically thought as employers internalize the expected costs of non‐compliance. We also show that employment effects are larger at low levels of non‐compliance (when the risk of being referred to court is very low). The implications for policy and the role of regulators in monitoring and sanctioning non‐compliance are discussed.