Optimal Policies and the Informal Sector
AbstractThis paper characterizes optimal policies in the presence of tax evasion and undocumented workers. Equilibrium can be characterized as segmented or non-segmented, depending on whether domestic workers work exclusively in the formal sector (segmented) or also in the informal sector (non-segmented). Surprisingly, in equilibrium, wages are always equalized between domestic and undocumented workers, even if they do not work in the same sectors of the economy. This is driven by the interaction of firm level decisions with optimal government policy. We also find that enforcement may not always be decreasing in its cost, and that governments will optimally enforce segmentation if enforcement costs are not too high.
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Bibliographic InfoPaper provided by McMaster University in its series Department of Economics Working Papers with number 2009-14.
Length: 37 pages
Date of creation: Sep 2009
Date of revision:
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More information through EDIRC
Informal Labour Market; Enforcement; Undocumented Workers; Public Good Provision;
Find related papers by JEL classification:
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-10-10 (All new papers)
- NEP-LAB-2009-10-10 (Labour Economics)
- NEP-PBE-2009-10-10 (Public Economics)
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