A Theory of Compliance with Minimum Wage Law
African Governance and Development Institute WP/14/008
10 Pages Posted: 10 Sep 2014
Date Written: June 8, 2014
Abstract
Purpose – In this paper, we introduce firm heterogeneity in the context of a model of non-compliance with minimum wage legislation.
Design/methodology/approach – Theoretical modeling under government compliance policy and wages & employment under non compliance.
Findings – The introduction of heterogeneity in the ease with which firms can be monitored for non compliance allows us to show that non-compliance will persist in sectors which are relatively difficult to monitor, despite the government implementing non stochastic monitoring. Moreover, we show that the incentive not to comply is an increasing function of the level of the minimum wage and increasing function of the gap between the minimum wage and the competitive wage rate.
Originality/value – We have shown why non compliance persists in certain sectors of activity despite frequent inspection by government agencies.
Keywords: Minimum wage legislation; informal sector in LDCs.
JEL Classification: H26, O17
Suggested Citation: Suggested Citation