Estimating the Causal Effect of Enforcement on Minimum Wage Compliance: The Case of South AfricaReview of Development Economics

This article is included in a special issue of the journal which includes 11 articles focused on informality.

Abstract: This paper attempts to estimate the causal effect of government enforcement on compliance with minimum wages in South Africa, a country where considerable non-compliance exists. The number of labor inspectors per capita is used as a proxy for enforcement, while non-compliance is measured using an index of violation that measures both the proportion of individuals violated, as well as the average depth of individual violation. Because of the potential simultaneity between enforcement and compliance, the number of labor inspectors is instrumented by the number of non-inspectors. The results suggest that there are a variety of factors impacting on violation, including firm-level, sectoral, and spatial characteristics. One of the key determinants of violation is found to be the local unemployment rate. However, the number of labor inspectors is found to be insignificant in determining non-compliance.