Carrots and sticks: Enforceable effort and the minimum wage

Rent controls lead not only to a smaller market quantity of rental housing; they also result in a deterioration in the quality of available rental housing. A model of the labor market is presented in which the same kind of adjustment can take place when a minimum wage is imposed. The quality of a job is represented by the effort level which workers expend on the job. We assume that firms can observe and control this level of effort. This assumption may be particularly true of the lower paying jobs which would be most affected by the imposition of a minimum wage.Although effort can be controlled, there are limits to how much effort the firm would enforce. To begin with, enforcing effort is costly. In addition, workers have the option of working elsewhere or engaging in non-market activity.We examine the Pareto optimum and short-run perfectly competitive versions of this problem. The two coincide when the on-the-job utility takes a form which eliminates income effects.When a minimum wage is imposed, the short-run perfectly competitive system is no longer Pareto optimal, even in the "second best" sense. For commonly used functional forms, we find that required effort increases enough to make utility on the job decline when a minimum wage is imposed. This contradicts the classical notion that the workers who keep their jobs under a minimum wage are better off. The overall welfare generated by the system also declines.This type of adjustment in the quality of jobs is not accounted for in the standard analysis. When the adverse effects of a minimum wage are measured only in terms of lost employment, therefore, they may be underestimated.