On Compliance with the Minimum Wage Law

Abstract

Economic analyses of effects of minimum wage laws usually assume implicitly that employers fully comply with such laws. However, in a recent article in this Journal, Ashenfelter and Smith (1979; hereafter AS) have shown that this is not case. Using data collected from employees, AS estimate that, for United States in 1973, only 64 percent of workers who would otherwise have earned less than federal minimum wage actually received minimum wage. Similar data collected from employers indicated a compliance rate of 77 percent. The magnitude of these numbers clearly indicates need for a better understanding of factors influencing noncompliance with federal minimum wage law. Ashenfelter and Smith present a model which explains employers' compliance behavior. They conclude that the incentive to comply is lower: (a) lower is market wage below minimum wage, and (b) larger is elasticity of demand for labor (in absolute value) (p. 336). They also argue that the requirement that a violating employer merely pay to employees a fraction of difference between minimum and actual wage received does not constitute a penalty for noncompliance at all (p. 337). However, by assuming that amount of penalty that employers pay if they do not comply is exogenously given, AS do not consider employment effects of minimum wage, that is, that noncomplying employers will have hired, in general, more workers than they would have if they had complied. Consequently, requirement that a noncomplying employer pay a fraction of difference between two wages to his employees constitutes a real penalty. This note presents an alternative formulation of model proposed by AS which accounts for fact that penalty that