Black Market, Labor Demand and Tax Evasion

According to many empirical studies, the size of the black market is growing in the OECD countries. Among the reasons for such a phenomena, is the labor market structure (mainly high total labor costs and the reduction in working hours in the official economy). The supply side of the labor market has been widely studied in the literature (see for instance Lemieux et al. 1994, Frederiksen et al. 2005). However there exist few analyses of the demand side (see for instance Fugazza and Jacques 2003) and in general they consider that the firms operate either on the official market or on the underground one. To the best of our knowledge there exists no formal analysis of the demand side of the labor market in which the firms can operate both in the official and (directly or indirectly) in the underground markets and this is very surprising given the (estimated) high number of illegal workers in most OECD countries. On the contrary, this paper focuses on the demand side and analyses the main driving forces behind the demand by (legal) firms for labor force in the black market. We show that the firms's technological characteristics matter. Moreover we construct a Principal-Multiagents model with an endogeneous probability for the Agents (the firms) to be detected by the Principal (the government) when using a black labor force. We assume the agents to compete in a Cournot Oligopoly structure and we show that at the Cournot equilibrium, the more the Principal controls the production reported by the agents, the more the probability of detection decreases.