Working Paper: CEPR ID: DP5107
Authors: Annab K. Basu; Nancy H. Chau; Ravi Kanbur
Abstract: In many countries, the authorities turn a blind eye to minimum wage laws that they have themselves passed. But if they are not going to enforce a minimum wage, why have one? Or if a high minimum wage is not going to be enforced one hundred percent, why not have a lower one in the first place? Can economists make sense of such phenomena? This paper argues that we can, if a high official minimum wage acts as a credible signal of commitment to stronger enforcement of minimum wage laws. We demonstrate this as an equilibrium phenomenon in a model of a monopsonistic labour market in which enforcement is costly, and the government cannot pre-commit to enforcement intensity. In this setting we also demonstrate the paradoxical result that a government whose objective function gives greater weight to efficiency relative to distributional concerns may end up with an outcome that is less efficient. We conclude by suggesting that the explanations offered in this paper may apply to a broad range of phenomena where regulations are imperfectly enforced.
Keywords: dynamic consistency; equity and efficiency; minimum wage; noncompliance
JEL Codes: D60; E61; J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high official minimum wage (J38) | increased expected enforcement intensity (K42) |
| increased expected enforcement intensity (K42) | higher subminimum wage (J38) |
| high official minimum wage (J38) | higher market wages (J31) |
| government prioritizing distributional concerns (D39) | enhanced enforcement credibility (K40) |
| enhanced enforcement credibility (K40) | improved overall market efficiency (G14) |
| lack of distributional concern (D39) | less efficient outcome (D61) |
| perceived likelihood of enforcement (K40) | varying employment outcomes (J68) |