Incentives to Comply with the Minimum Wage in the United States and the United Kingdom

Abstract

There is substantial evidence of minimum wage non-compliance in the United States and the United Kingdom. In this article, the author compiles new, comprehensive data on the costs that minimum wage violators incur when non-compliance is detected. In both countries, the costs violators face are often little more than the money they saved by underpaying. To have an incentive to comply under existing penalty regimes, typical US firms would thus have to expect a 47% to 83% probability of detection by the Department of Labor (DOL), or a 25% probability of a successful Fair Labor Standards Act (FLSA) suit. In the United Kingdom, typical firms would have to expect a 44% to 56% probability of detection. Actual probabilities of detection are substantially lower than this for many firms and would likely remain so even with realistic increases in enforcement capacity. Improved enforcement alone is thus insufficient: Expected penalties must also substantially increase to ensure that most firms have an incentive to comply.