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Noncompliance and the effects of the minimum wage on hours and welfare in competitive labor markets

  • Danziger, Leif

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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Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 16 (2009)
Issue (Month): 6 (December)
Pages: 625-630

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Handle: RePEc:eee:labeco:v:16:y:2009:i:6:p:625-630
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  1. Frank Walsh & Eric Strobl, 2003. "Minimum Wages and compliance : the case of Trinidad and Tobago," Open Access publications 10197/184, School of Economics, University College Dublin.
  2. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
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  4. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings Uncertainty and Precautionary Saving," CEPR Discussion Papers 699, C.E.P.R. Discussion Papers.
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  6. Gindling, T. H. & Terrell, Katherine, 2006. "Minimum Wages, Globalization and Poverty in Honduras," IZA Discussion Papers 2497, Institute for the Study of Labor (IZA).
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  8. Zavodny, Madeline, 2000. "The effect of the minimum wage on employment and hours," Labour Economics, Elsevier, vol. 7(6), pages 729-750, November.
  9. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
  10. David Neumark & DMark Schweitzer & DaWilliam Wascher, 2004. "Minimum Wage Effects throughout the Wage Distribution," Journal of Human Resources, University of Wisconsin Press, vol. 39(2).
  11. Simon C. Parker & Yacine Belghitar & Tim Barmby, 2005. "Wage Uncertainty and the Labour Supply of Self-Employed Workers," Economic Journal, Royal Economic Society, vol. 115(502), pages C190-C207, 03.
  12. Neumark, David & Wascher, William, 2007. "Minimum Wages and Employment," IZA Discussion Papers 2570, Institute for the Study of Labor (IZA).
  13. Martin Flodén, 2006. "Labour Supply and Saving Under Uncertainty," Economic Journal, Royal Economic Society, vol. 116(513), pages 721-737, 07.
  14. Leif Danziger, 2009. "Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms," CESifo Working Paper Series 2740, CESifo Group Munich.
  15. Yaniv, Gideon, 2001. "Minimum Wage Noncompliance and the Employment Decision," Journal of Labor Economics, University of Chicago Press, vol. 19(3), pages 596-603, July.
  16. Ashenfelter, Orley & Smith, Robert S, 1979. "Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 333-50, April.
  17. 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.
  18. David Weil, 2005. "Public Enforcement/Private Monitoring: Evaluating a New Approach to Regulating the Minimum Wage," ILR Review, Cornell University, ILR School, vol. 58(2), pages 238-257, January.
  19. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
  20. Chang, Yang-Ming & Ehrlich, Isaac, 1985. "On the Economics of Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 84-91, February.
  21. David Neumark & William Wascher, 1992. "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws," ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  22. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  23. Deere, Donald & Murphy, Kevin M & Welch, Finis, 1995. "Employment and the 1990-1991 Minimum-Wage Hike," American Economic Review, American Economic Association, vol. 85(2), pages 232-37, May.
  24. Burkhauser, Richard V & Couch, Kenneth A & Wittenburg, David C, 2000. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 653-80, October.
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