Illegality, Minimum Wages, and Credible Commitment
By David Henderson
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!