Underreporting of earnings and the minimum wage spike

an article by Mirco Tonin (University of Southampton, UK; Central European University, Budapest, Hungary; and IZA, Bonn, Germany) published in IZA Journal of European Labor Studies Volume 2 Number 2 (2013)

Abstract

This paper contributes to the policy debate on minimum wage by highlighting its role in enforcing compliance with fiscal rules in economies where under-reporting of earnings is widespread.

First, I propose a simple model exploring the interaction between the minimum wage and under-reporting of earnings.

Then, I provide supportive evidence by documenting a positive correlation within European labour markets between the proportion of full-time employees with earnings on the minimum wage and the extent of under-reporting of earnings in the economy.

The analysis presented in this paper suggests that a high spike in the wage distribution at the minimum wage level is, in some contexts, a fiscal issue, more than a labour market issue, and therefore it would be incorrect to consider a high spike as an indication of a binding minimum wage.

Also, differentiating the minimum wage along dimensions related to earnings (e.g. education, sector, or occupation) makes sense from an enforcement perspective.

JEL classification: J38, H26

Full text (PDF 18pp)

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