Noncompliance and the Effects of the Minimum Wage on Hours and Welfare in Competitive Labor Markets

22 Pages Posted: 15 Oct 2009

See all articles by Leif Danziger

Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

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Abstract

This paper shows that increases in the minimum wage rate can have ambiguous effects on the working hours and welfare of employed workers in competitive labor markets. The reason is that employers may not comply with the minimum wage legislation and instead pay a lower subminimum wage rate. If workers are risk neutral, we prove that working hours and welfare are invariant to the minimum wage rate. If workers are risk averse and imprudent (which is the empirically likely case), then working hours decrease with the minimum wage rate, while their welfare may increase.

Keywords: working hours, minimum wage, noncompliance, competitive labor markets, welfare

JEL Classification: J38

Suggested Citation

Danziger, Leif, Noncompliance and the Effects of the Minimum Wage on Hours and Welfare in Competitive Labor Markets. IZA Discussion Paper No. 4408, Available at SSRN: https://ssrn.com/abstract=1489231

Leif Danziger (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

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