Productivity, Non-Compliance and the Minimum Wage

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Title: Productivity, Non-Compliance and the Minimum Wage
Authors: Badaoui, ElianeWalsh, Frank
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Date: Nov-2021
Online since: 2022-02-28T16:19:54Z
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.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Start page: 1
End page: 60
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP2021/26
Copyright (published version): 2021 the Authors
Keywords: Minimum wageProductivityNon-complianceInformal sectorFirms
JEL Codes: D24; J31; O17
Language: en
Status of Item: Not peer reviewed
This item is made available under a Creative Commons License:
Appears in Collections:Economics Working Papers & Policy Papers

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