Noncompliance Behavior of Risk-Averse Firms Under the Minimum Wage Law

Abstract

This article is concerned with the law evasion (reduced wages) and law avoidance (modified employment) aspects of noncompliance behavior by risk-averse firms under the minimum wage law. It demonstrates that the adverse disemployment effects of a legal minimum wage under the conventional "full compliance" assumption should be modified by an "employment effect" of noncompliance, although it is shown that risk-averse violating firms would employ less labor than they would if they were risk-neutral. Findings suggest that the most effective strategy for motivating risk-averse firms to comply with minimum wage laws is imposing stiffer penalty fees.