Under the wage floor

Exploring firms’ incentives to comply with the minimum wage

This briefing note is part of a three-year programme of research exploring labour market enforcement generously funded by Unbound Philanthropy. In it, we explore the incentives for firms to comply with the National Living Wage/National Minimum Wage (NLW/NMW).

We document the penalties that firms are subject to both in theory and in practice if caught underpaying the NLW/NMW; estimate their current upper bound rate of detection; and show that even if detection rates increased significantly they would need to go hand-in-hand with higher financial penalties to provide firms with a hard, economic incentive to comply with the law.

The topic is highly relevant to policy makers for two key reasons. First, rising rates of measured underpayment have been observed in the last two years, suggesting firms are already under some strain. Second, the government is committed to raising the wage floor considerably over the parliament which can only increase the risk of underpayment.