Combating wage theft in subcontracted day labor markets

In subcontracted day labor markets, workers are especially vulnerable to wage theft, particularly in sectors like construction where subcontracting industry structures complicate accountability. This article introduces a principal-agent model to examine the conditions necessary to mitigate wage theft in subcontracted labor arrangements, focusing on the relationship between subcontractors and day laborers. We find that the fines necessary to eliminate theft are significantly larger than those imposed by current practices, making wage theft likely to persist under penalty-based methods alone. Through numerical analysis, we show how wage theft disproportionately affects workers with lower reservation utilities, and observe that workers with similar reservation utilities experience comparable impacts, regardless of their skill levels. To address the limitations of penalty-based approaches, we extend the model to a repeated game that formally characterizes the impact of worker awareness. We prove that wage theft becomes a dominated strategy—and is thus fully eliminated—when workers are fully aware of a subcontractor’s history, even when formal penalties are weak. More broadly, our analysis reveals the complementary relationship between wage theft prevention policies and information sharing: modest penalties become highly effective when paired with transparency initiatives, while heightened awareness can successfully deter theft even in environments with limited enforcement. This highlights that fostering worker awareness is a powerful and viable policy lever for preventing wage theft.