Partial minimum wage compliance

Abstract

In many developing countries, a significant portion of the wage distribution is found below the legal minimum wage. In order to fully understand the nature of this non-compliance, we need to compare the counterfactual wage distribution without the minimum wage law to the current wage distribution. Such a comparison could reveal partial compliance, where employers raise wages some of the way to the minimum wage, to balance out the benefits of non-compliance with the costs and penalties to the extent that they depend on the gap between the legal minimum wage and the wage actually paid. This paper presents a simple model of such partial compliance and uses its predictions to structure an empirical investigation of the impact of introducing a minimum wage law for agricultural workers in South Africa. We find that partial compliance is indeed taking place and further, the lowest wages are being raised disproportionately, consistent with the predictions of the model. JEL codes: J23, J25, J31, J32, J38, J43

The political economy of state governance in global production networks: change, crisis and contestation in the South African fruit sector

“…The most frequently visited farm received an inspection once every two years, with the remaining five farms visited by the DoL once every three years. These findings correspond with other academic and civil society reports highlighting the lack of DoL enforcement capacity on agricultural farms in the Western Cape Benjamin 2011;Bhorat et al 2015). At the same time, the presence of the ETI base code on the fruit farms was found to increase enforcement and compliance levels with labour standards, due to a combination of regular ethical audits and producer incentives to maintain contracts with UK and European lead firm supermarkets.…”

Compliance with labor laws in developing countries

“…These differences in outcomes suggest that the employment effects of a minimum wage hike are unpredictable, particularly when there is imperfect enforcement, so that both compliant and non-compliant employers are in the labor market. One study provides evidence of partial compliance in South Africa-where employers adjust wages upwards as a result of the law, but not all the way to the minimum wage [7]. Such results strongly suggest that it is important to understand employer responses to the minimum wage as occurring across a range at and below the set minimum.…”

“…Development Policy Research Unit Policy Brief PB 13/29, May 2013. Version 2 of the article updates the "Pros," discusses the measurement of multidimensional labor law violation and effective regulation and enforcement, and adds new "Key references" [7], [12], [13].…”

Inequality in the South African labour market: The political economy of the national minimum wage

“…Secondly, however, there appears to be some evidence that enforcement has been uneven, and a number of sectors have large numbers of workers that are being paid below the NMW. Third, the early evidence suggests that there have not been any significant effects on unemployment (Bhorat et al, 2020). Any further analysis of this is, however, likely to be significantly distorted by the fact that the Covid-19 pandemic has had such a large impact on employment that any dis-employment effects of the NMW will be crowded out.…”

“…At the time of writing, the NMW has been in place for 18 months. Early evidence suggests that there have not been widescale job losses, particularly in the vulnerable sectors of agriculture and domestic work (Bhorat et al, 2020). It is, however, important not to dismiss the risks of unemployment from an NMW.…”