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The "emersion" effect: an ex post and ex ante social program evaluation on labor tax evasion in Italy

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Author Info

  • Edoardo Di Porto

    (MEMOTEF, Department "Sapienza" University of Rome and EQUIPPE USTL/Lille)

  • Leandro Elia

    (Institute for the Protection and Security of the Citizen European Commission-Joint Research Centre)

  • Cristina Tealdi

    ()
    (IMT Lucca Institute for Advanced Studies)

Abstract

We analyze how different policy interventions may incentive the transition of workers from the informal to the formal sector. We use Italian data over the period 1998-2008 to evaluate ex post whether the 2003 Italian labor market reform was able to reach the objective to reduce the share of shadow employment. Based on our empirical results, we develop an ex ante evaluation based on a search and matching model, á la Mortensen and Pissarides to determine the right combination of policy interventions which may be effective in generating a significant reduction in undeclared work together with an expansion of the formal sector. We find that in an economy where permanent and temporary contracts coexist, the combination of lower payroll taxes for permanent jobs and higher probability of being audited generates a compression of the informal sector, leaving unemployment unchanged. A similar result can be obtained through a reduction of the firing cost associated with permanent jobs, even though this causes temporary contracts to increase relatively more than permanent contracts.

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File URL: http://eprints.imtlucca.it/1623/1/EIC_WP_2_2013.pdf
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Bibliographic Info

Paper provided by IMT Institute for Advanced Studies Lucca in its series Working Papers with number 2/2013.

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Length: 44 pages
Date of creation: Jun 2013
Date of revision: Jun 2013
Handle: RePEc:ial:wpaper:2/2013

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Keywords: Labor tax evasion; temporary contracts; firing costs; search frictions; policy evaluation;

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