Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws

29 Pages Posted: 8 Aug 2005

See all articles by Arnab K. Basu

Arnab K. Basu

College of William and Mary - Department of Economics

Nancy H. Chau

Cornell University - School of Applied Economics and Management; IZA Institute of Labor Economics

Ravi Kanbur

Cornell University; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

In many countries, the authorities turn a blind eye to minimum wage laws that they have themselves passed. But if they are not going to enforce a minimum wage, why have one? Or if a high minimum wage is not going to be enforced one hundred percent, why not have a lower one in the first place? Can economists make sense of such phenomena? This paper argues that we can, if a high official minimum wage acts as a credible signal of commitment to stronger enforcement of minimum wage laws. We demonstrate this as an equilibrium phenomenon in a model of a monopsonistic labor market in which enforcement is costly, and the government cannot pre-commit to enforcement intensity. In this setting, we also demonstrate the paradoxical result that a government whose objective function gives greater weight to efficiency relative to distributional concerns may end up with an outcome that is less efficient. We conclude by suggesting that the explanations offered in this paper may apply to a broad range of phenomena where regulations are imperfectly enforced.

Keywords: Minimum wage, dynamic consistency, non-complience, equity and efficiency

JEL Classification: D60, E61, J38

Suggested Citation

Basu, Arnab K. and Chau, Nancy H. and Kanbur, Ravi, Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws (June 2005). CEPR Discussion Paper No. 5107. Available at SSRN: https://ssrn.com/abstract=779288

Arnab K. Basu

College of William and Mary - Department of Economics ( email )

Williamsburg, VA 23187-8795
United States
757-221-1318 (Phone)
757-221-1175 (Fax)

HOME PAGE: http://faculty.wm.edu/akbasu/

Nancy H. Chau

Cornell University - School of Applied Economics and Management ( email )

Ithaca, NY 14853
United States
607-255-4463 (Phone)
607-255-9984 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ravi Kanbur (Contact Author)

Cornell University ( email )

301-J Warren Hall
Ithaca, NY 14853
United States
607-255-7966 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://www.kanbur.dyson.cornell.edu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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