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Wages, Unemployment, and the Underground Economy

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Author Info
Kolm, A.S.
Larsen, B.

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Abstract

While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Different goods are produced in the formal sector and the informal sector, and workers search for jobs in both sectors. We analyse the impact of higher punishment rates and a higher audit rate on labor market performance, and we find that a higher punishment rate (i) reduces the size of the informal sector and increases the size of the formal sector, (ii) decreases real producer wages in both sectors, and (iii) reduces the unemployment rate. The effect of a higher audit rate is less clear. We find that a higher audit rate (i) reduces the size of the informal sector relative to the size of the formal sector, and (ii) has an ambiguous impact on unemployment and real wages.

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Publisher Info
Paper provided by Uppsala - Working Paper Series in its series Papers with number 2001:08.

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Length: 25 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:fth:uppaal:2001:08

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Related research
Keywords: TAX EVASION ; UNEMPLOYMENT ; UNDERGROUND ECONOMY;

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Find related papers by JEL classification:
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Ahn, Namkee & De la Rica, Sara, 1997. "The Underground Economy in Spain: An Alternative to Unemployment?," Applied Economics, Taylor and Francis Journals, vol. 29(6), pages 733-43, June. [Downloadable!] (restricted)
  2. Kolm, Ann-Sofie & Larsen, Birthe, 2002. "Social norm, the informal sector and unemployment," Working Papers 04-2002, Copenhagen Business School, Department of Economics. [Downloadable!]
    Other versions:
  3. Yitzhaki, Shlomo, 1974. "Income tax evasion: A theoretical analysis," Journal of Public Economics, Elsevier, vol. 3(2), pages 201-202, May. [Downloadable!] (restricted)
  4. James Albrecht & Susan Vroman, 2002. "A Matching Model with Endogenous Skill Requirements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 283-305, February. [Downloadable!] (restricted)
    Other versions:
  5. Tito Boeri & Pietro Garibaldi, . "Shadow Activity and Unemployment in a Depressed Labor Market," Working Papers 177, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  6. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Cremer, Helmuth & Gahvari, Firouz, 1993. "Tax evasion and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 50(2), pages 261-275, February. [Downloadable!] (restricted)
  8. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  9. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November. [Downloadable!] (restricted)
  10. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January. [Downloadable!] (restricted)
  11. Kolm, Ann-Sofie & Larsen, Birthe, 2001. "Moral Costs, The Informal Sector And Unemployment," Working Papers 01-2001, Copenhagen Business School, Department of Economics. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Elisabetta Marzano, 2004. "Dual Labour Market Theories And Irregular Jobs: Is There a Dualism Even in The Irregular Sector?," CELPE Discussion Papers 81, CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy. [Downloadable!]
  2. Kolm, Ann-Sofie & Larsen, Birthe, 2003. "Does Tax Evation Affect Unemployment and Educational Choice?," Working Paper Series 2003:22, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  3. Boeri, Tito & Garibaldi, Pietro, 2002. "Shadow Activity and Unemployment in a Depressed Labour Market," CEPR Discussion Papers 3433, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Kolm, Ann-Sofie & Nielsen, Søren Bo, 2005. "Under-reporting of Income and Labor Market Performance," Research Papers in Economics 2005:5, Stockholm University, Department of Economics. [Downloadable!]
    Other versions:
  5. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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