The Expected Penalty for Committing a Crime: An Analysis of Minimum Wage Violations

Abstract

Several papers have noted and sought to explain the paradox of minimum wage law compliance. Compliance rates are high even though the penalty for violating the law is allegedly less than the underpayment to workers. By comparison, we show that the actual penalty exceeds the underpayment. We combine our estimates of the costs of violating the law with estimates of the probability of apprehension to arrive at the expected cost of violating the law. In contrast with previous work, we find that the expected costs are sufficiently high to make compliance rational.