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Productivity, Non-Compliance and the Minimum Wage

Author

Listed:
  • Eliane Badaoui
  • Frank Walsh

Abstract

Many informal firms in developing countries would not be viable if they were to comply with the minimum wage law. This means the authorities have an incentive to turn a blind eye to non-enforcement in a substantial share of firms. We also survey enforcement mechanisms for the minimum wage across developing countries and find that worker complaints are an important element in determining whether firms will be inspected for non-compliance or not. We develop a theoretical monopsony model which rationalises the stylised facts we observe. For a given minimum wage, the government can choose a level of enforcement and penalties for non-compliance such that employment will not fall for any optimising firm, irrespective of their productivity. Low productivity firm’s optimal choice of employment and wage will be unaffected by the introduction of the minimum wage. High productivity firms comply so that wage and employment effects are non-negative for these firms.

Suggested Citation

  • Eliane Badaoui & Frank Walsh, 2021. "Productivity, Non-Compliance and the Minimum Wage," Working Papers 202126, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:202126
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    File URL: http://hdl.handle.net/10197/12771
    File Function: First version, 2021
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    More about this item

    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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