Measuring non-compliance with minimum wages

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customers stand at bar while bar worker pulls pintby Felix Ritchie:

When a minimum wage is set, ensuring that employees do get at least that minimum is a basic requirement of regulators. Compliance with the minimum wage can vary wildly: amongst richer countries, around 1%-3% of wages appear to fall below the minimum but in developing countries non-compliance rates can be well over 50%.

As might be expected, much non-compliance exists in the ‘informal’ economy: family businesses using relatives on an ad hoc basis, cash-only payments for casual work, agricultural labouring, or simply the use of illegal workers. However, there is also non-compliance in the formal economy. This is analysed by regulators using large surveys of employers and employees which collect detailed information on hours and earnings. This analysis allows them to identify broad characteristics and the overall scale of non-compliance in the economy.

In the UK, enforcement of the minimum wage is carried out by HM Revenue and Customs, supported by the Low Pay Commission. With 30 million jobs in the UK, and 99% of them paying at or above the minimum wage, effective enforcement means knowing where to look for infringements (for example, retail and hospitality businesses tend to pay low, but compliant, wages; personal services are more likely to pay low wages below the minimum; small firms are more likely to be non-compliant than large ones, and so on). Ironically, the high rate of compliance in the UK can bring problems, as measurement becomes sensitive to the way it is calculated.

A new paper by researchers at UWE and the University of Southampton looks at how non-compliance with minimum wages can be accurately measured, particularly in high-income countries. It shows how the quantitative measurement of non-compliance can be affected by definitions, data quality, data collection methods, processing and the choice of non-compliance measure.

The paper shows that small variations in these can have disproportionate effects on estimates of the amount of non-compliance. As a case study, it analyses the earnings of UK apprentices to show, for example, that even something as simple as the number of decimal places allowed on a survey form can have a significant effect on the non-compliance rates.

The study also throws light on the wider topic of data quality. Much research is focused on marginal analyses: looking at the relative relationships between different factors. These don’t tend to be obviously sensitive to very small variations in data quality, but that is partly because it is can be harder to identify sensitive values.

In contrast, non-compliance with the minimum wage is a binary outcome: a wage is either compliant or it is not. This makes tiny variations (just above or just below the line) easier to spot, compared to marginal analysis. Whilst this study focuses on compliance with the minimum wage, it highlights how an understanding of all aspects of the data collection process, including operational factors such as limiting the number of significant digits, can help to improve confidence in results.

Ritchie F., Veliziotis M., Drew H., and Whittard D. (2018) “Measuring compliance with minimum wages”. Journal of Economic and Social Measurement, vol. 42, no. 3-4, pp. 249-270.

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