Wages, Unemployment, and the Underground Economy
AbstractWhile 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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Bibliographic InfoPaper 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:
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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
More information through EDIRC
Tax evasion; underground economy; matching; bargaining; unemployment;
Other versions of this item:
- Ann-Sofie Kolm & Birthe Larsen, 2003. "Wages, Unemployment, and the Underground Economy," CESifo Working Paper Series 1086, CESifo Group Munich.
- Kolm, A.S. & Larsen, B., 2001. "Wages, Unemployment, and the Underground Economy," Papers 2001:08, Uppsala - Working Paper Series.
- Kolm, Anne-Sofie & Larsen, Birthe, 2003. "Wages, unemployment, and the underground economy," Working Papers 11-2003, Copenhagen Business School, Department of Economics.
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
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