On Compliance with the Minimum Wage Law

Economic analyses of the effects of minimum wage laws usually assume implicitly that employers fully comply with such laws. However, in a recent article in this Journal, Ashenfelter and Smith (1979; hereafter AS) have shown that this is not the case. Using data collected from employees, AS estimate that, for the United States in 1973, only 64 percent of the workers who would otherwise have earned less than the federal minimum wage actually received the minimum wage. Similar data collected from employers indicated a compliance rate of 77 percent. The magnitude of these numbers clearly indicates the need for a better understanding of the factors influencing noncompliance with the federal minimum wage law. Ashenfelter and Smith present a model which explains employers' compliance behavior. They conclude that "the incentive to comply is lower: (a) the lower is the market wage below the minimum wage, and (b) the larger is the elasticity of demand for labor (in absolute value)" (p. 336). They also argue that "the requirement that a violating employer merely pay to employees a fraction of the difference between the minimum and the actual wage received does not constitute a penalty for noncompliance at all" (p. 337). However, by assuming that the amount of the penalty that employers pay if they do not comply is exogenously given, AS do not consider the employment effects of the minimum wage, that is, that noncomplying employers will have hired, in general, more workers than they would have if they had complied. Consequently, the requirement that a noncomplying employer pay a fraction of the difference between the two wages to his employees constitutes a real penalty. This note presents an alternative formulation of the model proposed by AS which accounts for the fact that the penalty that the