Inspections and Compliance: Enforcement of the Minimum-Wage Law

Abstract

This paper is the first to empirically study the relationship between spatial distributions oflabor market inspections and noncompliance with Germany’s minimum-wage law. Combiningnovel administrative data with large-scale longitudinal survey data, we documentthat the inspection probability is higher in regions with higher noncompliance. This impliesrisk-based allocation of the inspection efforts and, hence, its endogeneity. Usingfixed effects and an instrumental-variable approach, we show that higher inspection effortshave a limited effect on compliance. Based on a theoretical framework and internationalevidence, we discuss challenges for law enforcement, the political importance ofcompliance, and possible improvement measures.