Estimating Penalties for Violating the Minimum Wage and Hiring Illegal Immigrants: The Case of the U.S. Apparel Manufacturing Industry

The U.S. apparel manufacturing industry includes many reputable firms, but is also believed to include many sweatshop operations. Sweatshop workers often work under sub-minimum wages, excessively long hours, and abusive management. Sweatshop establishments in the United States typically violate several U.S. labor laws. Two they commonly violate are the minimum wage under the Fair Labor Standards Act of 1938 and the ban on hiring illegal immigrants under the Immigration Reform and Control Act of 1986. The purpose of the present research was to estimate minimum penalties that would provide no monetary incentive for the average U.S. apparel manufacturing firm to violate the minimum wage and the ban on hiring illegal immigrants.The minimum per-violation penalties that were estimated to deter violation of the minimum wage are 8 to 28 times the current maximum penalty of $1,000 per violation, and those estimated to deter the hiring of illegal immigrants are 3 to 10 times the current maximum penalty of $10,000 per violation. The estimated penalties are associated with annual probabilities of prosecution ranging from 5% to 15%. The estimated penalties primarily depend on the difference between legal and illegal wage rates. A sensitivity analysis indicated that the estimated penalties are insensitive to the value of the own-price elasticity of production labor demand, which is one of the variables used to calculate the penalties. The results suggest that current federal penalties for violating the minimum wage or the ban on hiring illegal immigrants do not deter infraction of these laws by U.S. apparel manufacturers.