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Underreporting of earnings and the minimum wage spike

Underreporting of earnings and the minimum wage spike
Underreporting of earnings and the minimum wage spike
This paper contributes to the policy debate on minimum wage by highlighting its role in enforcing compliance with fiscal rules in economies where underreporting of earnings is wide-spread. First, I propose a simple model exploring the interaction between the minimum wage and underreporting 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 underreporting 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.
Minimum Wage, spike, underreporting, tax evation
2193-9012
Tonin, Mirco
2929ca00-ca4e-4eb3-bf2b-a5d233b80253
Tonin, Mirco
2929ca00-ca4e-4eb3-bf2b-a5d233b80253

Tonin, Mirco (2013) Underreporting of earnings and the minimum wage spike. IZA Journal of European Labor Studies.

Record type: Article

Abstract

This paper contributes to the policy debate on minimum wage by highlighting its role in enforcing compliance with fiscal rules in economies where underreporting of earnings is wide-spread. First, I propose a simple model exploring the interaction between the minimum wage and underreporting 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 underreporting 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.

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Accepted/In Press date: February 2013
Keywords: Minimum Wage, spike, underreporting, tax evation
Organisations: Economics

Identifiers

Local EPrints ID: 348249
URI: https://eprints.soton.ac.uk/id/eprint/348249
ISSN: 2193-9012
PURE UUID: 60615852-0742-489e-96d2-6e902fbf038e

Catalogue record

Date deposited: 11 Feb 2013 10:57
Last modified: 18 Jul 2017 04:53

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Contributors

Author: Mirco Tonin

University divisions

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