Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws

Arnab Basu (), Nancy H. Chau () and Ravi Kanbur ()
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Ravi Kanbur: Cornell University

No 2998, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: In many countries, non-compliance with minimum wage legislation is widespread, and authorities may be seen as having turned a blind eye to a legislation that they have themselves passed. But if enforcement is imperfect, how effective can a minimum wage be? And if non-compliance is widespread, why not revise the minimum wage? This paper examines a minimum wage policy in a model with imperfect competition, imperfect enforcement and imperfect commitment, and argues that it is the combination of all three that produces results which are consistent with a wide range of stylized facts that would otherwise be difficult to explain within a single framework. We demonstrate that turning a blind eye can indeed be an equilibrium phenomenon with rational expectations subject to an ex post credibility constraint. Since credible enforcement requires in effect a credible promise to execute ex post a costly transfer of income from employers to workers, a government with an objective function giving full weight to efficiency but none to distribution is shown, paradoxically, to be unable to credibly elicit efficiency improvements via a minimum wage reform.

Keywords: non-compliance; minimum wage; dynamic consistency; equity and efficiency (search for similar items in EconPapers)
JEL-codes: D6 E61 J38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: 2007-08
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Working Paper: Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws (2005)
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