Turning a blind eye: costly enforcement, credible commitment and minimum wage laws

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 2998

Classification and Topics

• Classification: Wirtschaft
• Subject: Mindestlohn ; Rechtsdurchsetzung

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Basu, Arnab K. ; Chau, Nancy H. ; Kanbur, Ravi
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/34569
• Last update: 10.03.2025, 11:43 AM CET