US Firms Have Little Financial Incentive to Comply with the Minimum Wage Posted on April 19, 2024 by Yves Smith
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But on top of that, it turns out cheating pays. Minimum wage enforcement is so weak and fines are so low that non-compliance is a good economic bet.
By Anna Stansbury, Assistant Professor in Work and Organization Studies Massachusetts Institute of Technology (MIT). Originally published at VoxEU
A minimum wage is only effective to the degree it is actually paid – and research suggests that minimum wage non-compliance is very common. This column uses data on all violations of the Fair Labor Standards Act in the US documented since 2005 to ask what incentives US firms have to comply with the federal minimum wage. While the law allows for large penalties, average penalty levels are far too low to give most firms an incentive to comply. As the federal minimum wage is increased, higher penalties and greater enforcement will be needed to ensure compliance.
The US federal minimum wage is the baseline labour market protection for low-wage workers. Debates rage over how high it should be, in policy and in academia (e.g. Roth et al 2022, Cazes and Garnero 2023). 1 But a minimum wage is only effective to the degree it is actually paid – and research suggests that minimum wage non-compliance is very common. Random Department of Labor inspections of fast food outlets over 2001-2005, for example, found 40% in violation of Fair Labor Standards Act (FLSA) minimum wage or overtime provisions, and random garment industry inspections in 2015-2016 found FLSA violations in 85% of workplaces (Weil 2014, 2018). 2
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In a new paper (Stansbury 2024), I compile case-level data on all FLSA violations identified by the Department of Labor since 2005 – combining publicly available data obtained in a Freedom of Information request. I use these data to ask: What incentive do US firms have to comply with the federal minimum wage? This question is important to understand the efficacy of existing minimum wage legislation, as well as to interpret other minimum wage research, including estimates of disemployment effects.
How to quantify a firm's incentive to comply with the minimum wage? A long tradition in economics applies a cost-benefit framework to compliance decisions, suggesting that a profit-maximising company complies with the law if the extra profits made by breaking the law are less than the expected costs (Becker 1968). Taking this cost-benefit approach, I use data on penalties levied on violators to infer the penalties firms can expect to face under different scenarios – and thus, to estimate the degree to which firms have an incentive to comply with the minimum wage, under different assumptions about the probability of detection.
While the law allows for large penalties, few firms face penalties over and above paying the wages that they owed
The FLSA requires that all firms who underpay the minimum wage pay the back wages owed. They can also be required to pay an equal amount in liquidated damages. Willful or repeat violators can be charged a civil monetary penalty. In certain cases, the 'hot goods provision' can be used to embargo goods made in violation of the FLSA. And the most serious violators can be referred for criminal prosecution.
Yet, my analysis of the Department of Labor data shows that most firms face minimal costs for underpaying the minimum wage, over and above paying workers the wages originally owed.
Liquidated damages can in theory be levied on a large share of minimum wage violations. They were, however, almost never levied in DOL cases prior to 2012. This policy has changed in more recent years (Weil 2018). By 2022/2023, more than 30% of cases concluded had liquidated damages assessed. The remaining two thirds did not.....
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