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

By A. Basu, Nancy H. Chau, Ravi Kanbur. Social Science Research Network, 2010

154 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/ccec678ee56a23d48bc51bff534f743402ae8d4b