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Social Norm, the Informal Sector, and Unemployment

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  • Ann-Sofie Kolm
  • Birthe Larsen

Abstract

In examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general-equilibrium model featuring matching frictions on the labor market and a social norm. Conducting informal work, or employing a worker informally, is associated with expected fines and payments of a moral cost, given that there is a social norm against tax evasion. This framework facilitates an analysis of how wage setting, unemployment, and the size of the informal sector are affected by punishment policies, which has been ignored in the previous literature. Furthermore, the inclusion of an endogenously determined norm against tax evasion may explain interregional differences in relative sizes of the formal and the informal sectors for similar tax and punishment systems.

Suggested Citation

  • Ann-Sofie Kolm & Birthe Larsen, 2002. "Social Norm, the Informal Sector, and Unemployment," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(3), pages 407-407, August.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(2002/200308)59:3_407:sntisa_2.0.tx_2-j
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    References listed on IDEAS

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    1. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470, Elsevier.
    2. Pissarides, Christopher A., 1998. "The impact of employment tax cuts on unemployment and wages; The role of unemployment benefits and tax structure," European Economic Review, Elsevier, vol. 42(1), pages 155-183, January.
    3. Namkee Ahn & Sara La De Rica, 1997. "The underground economy in Spain: an alternative to unemployment?," Applied Economics, Taylor & Francis Journals, vol. 29(6), pages 733-743.
    4. Wen-Ya Chang & Ching-Chong Lai, 1996. "The Implication of Efficiency Wages On Tax Evasion and Tax Collections," Public Finance Review, , vol. 24(2), pages 163-172, April.
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    Citations

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    Cited by:

    1. H. Lehmann & T. Razzolini & A. Zaiceva, 2011. "Job Separations, Job Loss and Informality in the Russian Labor Market," Working Papers wp800, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Lehmann, Hartmut & Razzolini, Tiziano & Zaiceva, Anzelika, 2011. "Job Separations and Informality in the Russian Labor Market," IZA Discussion Papers 6230, Institute of Labor Economics (IZA).
    3. Kolm, Ann-Sofie & Larsen, Birthe, 2003. "Does Tax Evation Affect Unemployment and Educational Choice?," Working Paper Series 2003:22, Uppsala University, Department of Economics.
    4. Kolm, Ann-Sofie & Larsen, Birthe, 2001. "Wages, Unemployment, and the Underground Economy," Working Paper Series 2001:8, Uppsala University, Department of Economics.
    5. Gabriele Ruiu & Gaetano Lisi, 2011. "Tax Morale, Slippery-Slope Framework and Tax Compliance: A Cross-section Analysis," Working Papers 2011-05, Universita' di Cassino, Dipartimento di Scienze Economiche.
    6. Stähler Nikolai, 2006. "Employment Protection: Its Effects on Different Skill Groups and on the Incentive to become Skilled," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 226(1), pages 41-54, February.
    7. Gaetano Lisi & Maurizio Pugno, 2011. "Tax Morale, Entrepreneurship, and the Irregular Economy," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(2), pages 116-131, August.
    8. James Albrecht & Lucas Navarro & Susan Vroman, 2009. "The Effects of Labour Market Policies in an Economy with an Informal Sector," Economic Journal, Royal Economic Society, vol. 119(539), pages 1105-1129, July.
    9. Kolml, Ann-Sofie & Larsen, Birthe, 2010. "The Black Economy and Education," Research Papers in Economics 2010:3, Stockholm University, Department of Economics.
    10. Gaetano Lisi & Maurizio Pugno, 2015. "A matching model of endogenous growth and underground firms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 11(4), pages 347-369, December.
    11. Ann-Sofie Kolm & Birthe Larsen, 2019. "Underground activities and labour market performance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(1), pages 41-70, February.
    12. Gaetano Lisi, 2019. "Slippery slope framework, tax morale and tax compliance: a theoretical integration and an empirical assessment," Discussion Papers in Economic Behaviour 0219, University of Valencia, ERI-CES.
    13. Arbex Marcelo & Corrêa Márcio V. & Magalhães Marcos R. V., 2023. "Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 23(1), pages 241-278, January.

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    More about this item

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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