David R. Henderson  

Illegality, Minimum Wages, and Credible Commitment

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Co-blogger Bryan Caplan finds "strange" the claim that "employers prefer to hire illegal immigrants because they don't have to pay them minimum wage or follow other labor market regulations." I don't find it strange at all.

First, although I know Bryan understands this, let's review why employers would be able to pay illegal immigrants less than the minimum wage and be able to ignore other labor-market regulations. Here's an excerpt from a piece I wrote in 2006:

Their [Dukakis's and Mitchell's] model of enforcement, it seems, is of diligent federal workers going into workplaces and checking records on wages paid. But employers willing to break the law on wages are likely to be willing to break the law on record-keeping. In 2005 the U.S. Department of Labor's Wage and Hour Division put 969,776 hours into enforcement of all parts of the federal wage regulations. This would translate into only 500 full-time workers nationwide. And not all of these were involved in enforcing the minimum wage: some were enforcing overtime regulations, child-labor regulations, and more. So even quadrupling the number of enforcers would not make a major dent when the number of low-wage employers would likely be in the hundreds of thousands.

The main enforcement of the minimum wage is initiated by employees, not by the government. An employee who thinks he was paid less than the minimum can contact the federal government or the state labor board and show his pay records. Then the government collects back wages and a fine from the employer. In 2005 the Labor Department reported 30,375 complaints registered about employer violations of wage and hours laws. The vast majority of these complaints were likely by employees. That's why the minimum wage is so effective. But employers aren't typically stupid. They know this risk, which is why even employers who have no ethical qualms about breaking the law hesitate to hire people at less than the minimum wage.

But there's one type of employee that the employer is not so afraid of hiring and paying less than the minimum: an illegal immigrant. Illegal immigrants are nervous about going to the government to report that they were paid less than the minimum. Employers, knowing this, are more willing to hire them. So while reducing the overall number of jobs, an increase in the minimum wage will actually open up more jobs for illegal immigrants, making it even harder for unskilled legal residents to find work.

How can not being able to sic the government on an employer be an advantage? However much someone might plead with an employer to offer him a job at below minimum wage, if the employer knows the employee can sue for back wages, he probably won't offer the job. But not being able to sue because the job candidate is here illegally makes his promise not to sue credible, which also means he doesn't even need to make such a promise. The illegal immigrant gets the job.


But, Bryan claims, "the key reason why illegal workers earn lower wages has to be that--from employers' point of view--the risks and hassle of hiring illegal workers outweigh the regulatory burden of hiring legal workers." Why "has to be?" Certainly, he correctly points to an offsetting factor. But there's no presumption that the risks and hassle are higher cost to the employer than the regulatory burden of hiring legal workers.

Bryan's evidence is that "amnesty raises wages of formerly illegal workers." That could be true on average but it's unlikely to be true in every case. Specifically, if you're an illegal worker already earning above the minimum, as the majority of illegal workers probably do, then your wage can increase when you become legal. But notice that because you were already earning above the minimum, the employer's ability to pay you less than the minimum when you were illegal is irrelevant: your productivity caused him to pay more than the minimum. So illegality was not an advantage to you when you were illegal.

But if you're an illegal worker earning less than the minimum, then when you become legal, your ability to credibly commit not to turn in the employer disappears. So the employer could well find it less beneficial to employ you.

Notice that Bryan even gives his own counterexample to his claim. He references a piece he wrote in which he said the following:

I vividly remember the day my dad hired a totally disappointing day laborer who spoke fluent English. Eventually my parents concluded that he was a U.S. citizen trying to pose as a hard-working illegal!


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COMMENTS (7 to date)
Foobarista writes:

As I mentioned elsewhere, the mental model of most people seems to focus on a big, "bureaucratic" employer with an HR department, payroll office, etc hiring a worker with forged papers.

This is probably more rare than under-the-table employment arrangements with small business owners or individuals, typically in the same ethnic and language group as the worker, and in situations that would be difficult to nearly impossible to police.

Tom West writes:

While there are certainly good points made in the argument, couldn't exactly the same points be made about any labor regulation whatsoever including workplace safety, sexual demands, child labor, etc.?

john hare writes:

A few years ago during the construction boom, it was a major advantage for the illegal/under the table employers. An employee of mine that earned $500.00 a week gross would take home a little over $400.00 a week after taxes. With my half of the SSI, workmans comp, and time to address those issues, it cost me on the order of $650.00 a week to employ that person.

The cash economy contractor could pay $350.00 or so a week and leave them eligible for food stamps and stuff that my guys didn't qualify for. Some of the illegals lived better than my guys on less take home pay. With labor costs around half of mine for some classes of employee. That's hard to compete with in markets that simply want production.

As a sub-contractor, I could only get work from custom builders that cared and homeowners, although that was sufficient at the time. Most customers care about how much they have to pay for a house of a certain size. How the track builders hit those numbers didn't concern the vast majority of them.

Ken B writes:

Like Bryan Iwas surprised by David's claim at first but it's a nice example of a perverse incentive, and an even nicer example of the game theoretic point that having extra choices can make you worse off.

Ken B writes:

I confess I have come to dread most of the immigration threads on Econlog. Most are just the Open Borders Purists vs the Sailerite Insinuation Brigade. (If not a pox then a least a mild cold on both houses.) This is quite different because it has an interesting and counter intuitive hook, and it's about the actual consequences of the policies.

Joe Johnson writes:

Doc,

I would also suggest there is a difference in the outlook of the employee that incentivizes hiring illegal immigrants.

There are workers who believe they are owed a minimum wage, and then there are workers who believe they are better off with the wage they are receiving.

Comparison: a worker who is grateful to be in the land of plenty with pay that is much higher than where they came from, with a worker who believes they are owed a certain wage.

Maybe the worker who believes they are better off (and usually are) performs better than a worker who believes they are owed a wage, regardless of performance.

As an employer, who would you prefer to hire?

Perhaps I'm reaching, but it seems to make sense.

Ken B writes:

JJ, not only does it make sense but it highlights an ugly aspect of the current policies. Under the rubric of tossing out freeloaders, the INS mostly goes after those so willing to work they even accept low wages and a life in the shadows.

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