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Insiders, Outsiders, and the Underground Economy

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  • Dan Anderberg

Abstract

This paper considers whether labour market rigidities lead to more underground economic activities. This is suggested by aggregate cross-country data which show that underground economic activities are more strongly correlated with a commonly used index of employment protection than with effective tax rates. A simple theoretical model is constructed to support this finding. The model, contrary to many models of equilibrium unemployment in the literature, also has the feature that a rise in a proportional tax affects employment (in addition to underground economic activities).

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-10/cesifo1_wp1048.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1048.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1048

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  1. Bertil Holmlund, 2002. "Labor Taxation in Search Equilibrium with Home Production," German Economic Review, Verein für Socialpolitik, vol. 3(4), pages 415-430, November.
  2. Daveri, Francesco & Tabellini, Guido, 1997. "Unemployment, Growth and Taxation in Industrial Countries," CEPR Discussion Papers 1681, C.E.P.R. Discussion Papers.
  3. Madsen, Jakob B, 1998. "General Equilibrium Macroeconomic Models of Unemployment: Can They Explain the Unemployment Path in the OECD?," Economic Journal, Royal Economic Society, vol. 108(448), pages 850-67, May.
  4. Friedrich Schneider, 2000. "The Increase of the size of the shadow economy of 18 OECD countries: Some preliminary explanations," Economics working papers 2000-08, Department of Economics, Johannes Kepler University Linz, Austria.
  5. Dan Anderberg & Alessandro Balestrino & Umberto Galmarini, 2003. "Search and Taxation in a Model of Underground Economic Activities," Economic Inquiry, Western Economic Association International, vol. 41(4), pages 647-659, October.
  6. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610, Wisconsin Madison - Social Systems.
  7. Nickell, Stephen, 1998. "Unemployment: Questions and Some Answers," Economic Journal, Royal Economic Society, vol. 108(448), pages 802-16, May.
  8. Gilles Saint Paul, 1999. "The political economy of employment protection," Economics Working Papers 355, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Pissarides, Christopher A., 2001. "Employment protection," Labour Economics, Elsevier, vol. 8(2), pages 131-159, May.
  10. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  11. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
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