A Theory of Compliance with Minimum Wage Law

African Governance and Development Institute WP/14/008

10 Pages Posted: 10 Sep 2014

See all articles by Simplice Asongu

Simplice Asongu

African Governance and Development Institute

Mohamed Jellal

Al Makrizi Institute of Economy

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

Asongu, Simplice and Jellal, Mohamed, A Theory of Compliance with Minimum Wage Law (June 8, 2014). African Governance and Development Institute WP/14/008. Available at SSRN: https://ssrn.com/abstract=2493443 or http://dx.doi.org/10.2139/ssrn.2493443

Simplice Asongu (Contact Author)

African Governance and Development Institute ( email )

P.O. Box 8413
Yaoundé, 8413
Cameroon

Mohamed Jellal

Al Makrizi Institute of Economy ( email )

Rabat
Morocco

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