Underreporting of Earnings and the Minimum Wage Spike

Abstract:     
This paper documents a positive correlation within European labour markets between the proportion of full-time employees with earnings on the minimum wage and the extent of underreporting of earnings in the economy. Using a simple model of a competitive labour market, I show how this correlation can emerge as a result of the common dependence of both quantities on the strength of enforcement of fiscal regulation. This suggests that a high spike in the wage distribution at the minimum wage level is, in some contexts, an issue of fiscal enforcement, more than a labour market issue.

Number of Pages in PDF File: 19

Keywords: minimum wage, spike, underreporting, lighthouse effect

JEL Classification: J38, H26

working papers series