informal sectors might be better modeled with the second part of the present paper, where non-compliance was the issue. Squire and Narueput, citing internal World
Bank studies suggest that up to 16 of men in Mexico’s large informal sector are the targets of minimum wage non-compliance. Regardless of which case one
considers, non-compliance or compliance, the deadweight losses from the mini- mum wage predicted by the present model are similarly worthy of attention.
5. Policy implications
Whenever a new deadweight loss is identified, we have to ask ourselves whether government or market institutions have not already moved to prevent the
loss. Unions exercise monopoly power to raise their wages. They may also choose their members so that these members have low reservation wages. This preserves
the surplus from high wages, and may be the union’s way of combating needless deadweight losses from improper selection. Even if unions do their part to keep
down the deadweight losses from controlled wages we must ask whether some government actions can help mitigate the problem. The US seems to have hit upon
a solution by exempting certain categories of workers from being paid the full-minimum wage. These are usually young people living at home with their
parents. These are likely to be individuals with low alternate values of their time and so are likely to have low reservation wages. Exempting them from part of the
minimum wage makes them attractive to hire and helps them jump the queue ahead of higher reservation wage workers not exempted from the minimum wage.
Unfortunately, micro-management of any part of the economy has proved a frustrating and ambiguous exercise for governments and I am reluctant to see such
an intervention as a major policy implication of the present paper. A more fruitful application of the results presented here would be to use the present deadweight
loss calculations to compare different methods of redistributing income. The minimum wage is, in all policy discussion, held as an income redistribution policy.
But is it the best policy? Might the deadweight losses from taxation not be lower than those from the minimum wage, and as such the costs of redistributing through
the income tax system cheaper than the deadweight losses of redistributing through wage control? Such questions have not been asked in the public finance or
labour economics literature. The theoretical apparatus developed in the present paper points to a means by which the optimal mix of redistribution through the tax
system and wage controls might be calculated.
6. Conclusion
