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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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File URL: http://www.sciencedirect.com/science/article/pii/S0927-5371(09)00092-X
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/labeco

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  1. Strobl, Eric & Walsh, Frank, 2003. "Minimum Wages and Compliance: The Case of Trinidad and Tobago," Economic Development and Cultural Change, University of Chicago Press, vol. 51(2), pages 427-50, January.
  2. Monica Paiella & Luigi Guiso, 2004. "Risk Aversion, Wealth and Background Risk," 2004 Meeting Papers 525, Society for Economic Dynamics.
  3. 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).
  4. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  5. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
  6. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings Uncertainty and Precautionary Saving," CEPR Discussion Papers 699, C.E.P.R. Discussion Papers.
  7. Gindling, T. H. & Terrell, Katherine, 2006. "Minimum Wages, Globalization and Poverty in Honduras," IZA Discussion Papers 2497, Institute for the Study of Labor (IZA).
  8. 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.
  9. Danziger, Leif, 2009. "Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms," IZA Discussion Papers 4320, Institute for the Study of Labor (IZA).
  10. 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.
  11. Floden, Martin, 2005. "Labor Supply and Saving under Uncertainty," SSE/EFI Working Paper Series in Economics and Finance 597, Stockholm School of Economics.
  12. 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.
  13. 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.
  14. 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.
  15. Orley C. Ashenfelter & Robert Smith, 1977. "Compliance with the Minimum Wage Law," Working Papers 478, Princeton University, Department of Economics, Industrial Relations Section..
  16. Neumark, David & Wascher, William, 2007. "Minimum Wages and Employment," IZA Discussion Papers 2570, Institute for the Study of Labor (IZA).
  17. Zavodny, Madeline, 2000. "The effect of the minimum wage on employment and hours," Labour Economics, Elsevier, vol. 7(6), pages 729-750, November.
  18. 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.
  19. 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.
  20. 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.
  21. Grenier, Gilles, 1982. "On Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 184-87, February.
  22. 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.
  23. repec:ebl:ecbull:v:10:y:2004:i:9:p:1-7 is not listed on IDEAS
  24. 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.).
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