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Joachim Rosenmüller
''Minimum wage noncompliance and the sub-minimum wage rate''
( 2004, Vol. 10 No.9 )
The present note examines the effect of minimum wage noncompliance on the sub-minimum wage rate in a competitive labor market. The note shows that noncompliance shifts leftward the demand curve of labor and shifts rightward the supply curve of labor, unambiguously leading to a fall in the equilibrium sub-minimum wage rate. Two implications follow: first, contrary to a major result in the minimum wage literature, noncompliance must not necessarily reduce employment (as compared to the pre-law level) it may even increase employment if the deterrent effect of the expected penalty is more than offset by the inducement effect of a lower wage rate. Secondly, and more importantly, if the minimum wage law aims at improving low wages, workers are better off without a law than with one which is not accompanied with sufficient inducement to ensure compliance.
JEL: J3 - Wages, Compensation, and Labor Costs: General
Manuscript Received : Jul 28 2004 Manuscript Accepted : Sep 10 2004

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