Media Briefings

Enforcing Minimum Wage Laws: The Importance Of Governments Making

  • Published Date: March 2010

Minimum wage laws may not always be obeyed, particularly in developing countries, but such non-compliance does not necessarily mean that minimum wages are set too high.

A high minimum wage combined with lack of enforcement is not capricious and without regard to the rule of law. It is the natural outcome when enforcement is costly and governments face a credibility problem as enforcers.

In such situations a higher minimum wage can signal – credibly – the government’s intentions to increase resources going to enforcement. Similarly, lowering of the minimum wage can undermine the credibility of enforcement.

These are the conclusions of research by Arnab Basu, Nancy Chau and Ravi Kanbur, published in the March 2010 issue of the Economic Journal.

There is now extensive evidence, particularly from developing country labour markets, that non-compliance with minimum wage laws is pervasive. Evidence also suggests that enforcement varies systematically across countries, across geographical regions and across industries within countries.

This study provides a labour market setting – emphasising imperfect enforcement, employer market power and an inability on the part of the government to commit fully to enforcing the minimum wage – that is consistent with a number of stylised facts in developed and developing country labour markets:

  • co-existence of compliant and non-compliant employers;
  • a spike of the wage distribution at the minimum wage;
  • a dispersion of sub-minimum wages;
  • and co-movements of minimum and sub-minimum wages.

Since enforcement of a minimum wage involves a costly transfer of income from employers to workers, a government’s concern for income distribution is shown to interact in interesting ways with the problem of credible commitment on enforcement.

Put simply, a government that cares more about income distribution will care more about violations of the minimum wage and can therefore signal a commitment to enforce. By the same token, a government that does not care at all about income distribution cannot improve efficiency.

The central conceptual point, however, is that the minimum wage and the intensity of enforcement have to be seen as jointly determined. Moving on one will have implications for the other. And asking, or requiring, the government to move on one in isolation can worsen outcomes for the poorest.

The emphasis on the ability to commit to enforce legislation can potentially shed new light on a range of policies other than the minimum wage, where enforcement and compliance are central. Some examples include tax evasion and enforcement, as well as financial bailouts and ex post enforcement of bailout conditions.


Notes for editors: Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws’ by Arnab Basu, Nancy Chau and Ravi Kanbur is published in the March 2010 issue of the Economic Journal.

Arnab Basu is at the College of William and Mary. Nancy Chau and Ravi Kanbur are at Cornell University.

For further information: contact Romesh Vaitilingam on 07768-661095 (email:; or Nancy Chau via email: