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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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
2001:8.
Length: 25 pages Date of creation: 15 Feb 2001 Date of revision: Handle: RePEc:hhs:uunewp:2001_008
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Find related papers by JEL classification: H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
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.:
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.
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