Minimum wage hikes can double as a tool to curb labour tax evasion—especially in economies where “envelope wages” (undeclared cash pay) are common and many workers are officially reported at the minimum wage. By raising the legal floor, governments can push non-compliant firms to formalise part of these hidden payments, increasing declared wages, tax revenues, and social security contributions—often without reducing total pay or employment in evading firms. However, this effect is uneven. Not all firms evade taxes, and fully compliant employers are more likely to face higher labour costs and potential job cuts. In addition, workers in evading firms may see lower take-home pay if higher taxes are passed on to them, and firms lose flexibility to adjust during downturns. Therefore, minimum wage policy can strengthen tax compliance and public revenues, but it creates trade-offs. Policymakers should hence pair wage increases with targeted enforcement and support for compliant firms to avoid unintended job losses and distributional impacts.
WORLD OF LABOUR
Raising pay floors can curb tax evasion but also creates trade-offs for jobs and compliant firms
