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Abstract

This 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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File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2009-14.pdf
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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2009-14.

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Length: 37 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:mcm:deptwp:2009-14

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Related research

Keywords: 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)

References

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1. Freeman, Scott & Grogger, Jeffrey & Sonstelie, Jon, 1996. "The Spatial Concentration of Crime," Journal of Urban Economics, Elsevier, vol. 40(2), pages 216-231, September.
2. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
3. Patricia Cortes, 2008. "The Effect of Low-Skilled Immigration on U.S. Prices: Evidence from CPI Data," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 381-422, 06.
4. Djajic, Slobodan, 1997. "Illegal Immigration and Resource Allocation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(1), pages 97-117, February.
5. Gary S. Becker, 1968. "Crime and Punishment: An Economic Approach," Journal of Political Economy, University of Chicago Press, vol. 76, pages 169.
   
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   • Gil S. Epstein & Odelia Heizler, 2007. "Illegal Migration, Enforcement and Minimum Wage," CReAM Discussion Paper Series 0708, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
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10. Aureo de Paula & Jose A Sheinkman, 2007. "The Informal Sector," Levine's Bibliography 122247000000001663, UCLA Department of Economics.
    
    • Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
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    • Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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11. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
12. Borjas, George J., 1999. "The economic analysis of immigration," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 28, pages 1697-1760 Elsevier.
13. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
14. Louis Kaplow, 1991. "Optimal Taxation with Costly Enforcement and Evasion," NBER Working Papers 2996, National Bureau of Economic Research, Inc.
    
    • Kaplow, Louis, 1990. "Optimal taxation with costly enforcement and evasion," Journal of Public Economics, Elsevier, vol. 43(2), pages 221-236, November.
15. Cremer, Helmuth & Gahvari, Firouz, 2000. "Tax evasion, fiscal competition and economic integration," European Economic Review, Elsevier, vol. 44(9), pages 1633-1657, October.
16. A. Mitchell Polinsky & Steven Shavell, 2005. "The Theory of Public Enforcement of Law," Discussion Papers 05-004, Stanford Institute for Economic Policy Research.
    
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17. Bond, Eric W. & Chen, Tain-Jy, 1987. "The welfare effects of illegal immigration," Journal of International Economics, Elsevier, vol. 23(3-4), pages 315-328, November.
18. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
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Citations

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Cited by:

1. Cuff, Katherine & Marceau, Nicolas & Mongrain, Steeve & Roberts, Joanne, 2011. "Optimal Policies with an Informal Sector," Journal of Public Economics, Elsevier, vol. 95(11), pages 1280-1291.
2. Ogndal, Tone, 2012. "In the Shadow of the Labour Market," Memorandum 05/2012, Oslo University, Department of Economics.

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