Partial minimum wage compliance

Haroon Bhorat,Ravi Kanbur,Benjamin Stanwix

doi:10.1186/s40175-015-0039-1

Haroon Bhorat, Ravi Kanbur + Show 1 more

Open Access

https://doi.org/10.1186/s40175-015-0039-1

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Abstract

In many developing countries, a significant portion of the wage distribution is found below the legal minimum wage. In order to fully understand the nature of this non-compliance, we need to compare the counterfactual wage distribution without the minimum wage law to the current wage distribution. Such a comparison could reveal partial compliance, where employers raise wages some of the way to the minimum wage, to balance out the benefits of non-compliance with the costs and penalties to the extent that they depend on the gap between the legal minimum wage and the wage actually paid. This paper presents a simple model of such partial compliance and uses its predictions to structure an empirical investigation of the impact of introducing a minimum wage law for agricultural workers in South Africa. We find that partial compliance is indeed taking place and further, the lowest wages are being raised disproportionately, consistent with the predictions of the model. JEL codes: J23, J25, J31, J32, J38, J43

Highlights

According to basic theory, the introduction of a fully enforced minimum wage in a perfectly competitive labor market will increase the wages of the employed to the minimum wage, but reduce employment
The first key result here is that V0, the proportion of farmworkers earning less than the minimum wage specified for workers in both areas, declines over the period 2001–2007
5 Conclusion When a minimum wage law is introduced, what happens to wages that were below the legal minimum wage? If there is perfect enforcement, we should not observe any workers earning below the minimum wage

Summary

Introduction

The introduction of a fully enforced minimum wage in a perfectly competitive labor market will increase the wages of the employed to the minimum wage, but reduce employment. Their measure of non-compliance was based on whether a worker was earning below the sectoral minimum wage, and not on the depth of the violation. We test for whether compliance with the agricultural minimum wage falls by more in districts where the average wage gap was larger in the pre-law period.

Results

Conclusion