On the employment effect of noncompliance with the minimum wage law

A major result of the economic literature on minimum wage noncompliance is that a competitive employer who opts not to comply with the minimum wage law will employ less labor than he would have in the absence of a law. The reason for this is that noncompliance entails the risk of getting caught and punished, consequently raising the marginal cost of labor to the employer. An implicit assumption underlying this result is that noncompliance does not affect the free market wage rate facing the competitive employer. The present note shows that noncompliance will bring about a fall in the market wage rate and that if employers and workers are risk neutral, the market wage rate will fall in a way that leaves the marginal cost of labor intact. Consequently, the enactment of a minimum wage law, if not accompanied by sufficient enforcement to induce compliance, will have no effect on the level of employment. (C) 2007 Elsevier Inc. All rights reserved.