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Minimum Wage and Tax Evasion: Theory and Evidence

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  • Mirco Tonin

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Abstract

The paper investigates the role of the minimum wage in a competi- tive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low- productivity workers and transforms a nominally neutral ?scal system into a regressive one. A spike in the wage distribution at the mini- mum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose o¢ cially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction ?nds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp865.

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Length: pages
Date of creation: 01 Jan 2007
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Handle: RePEc:wdi:papers:2007-865

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Keywords: MinimumWage; Tax Evasion; Wage Distribution; Hungary;

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Minimum wage and tax evasion
    by Economic Logician in Economic Logic on 2011-05-31 14:27:00
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Cited by:
  1. Fialova, Kamila & Schneider, Ondrej, 2011. "Labor institutions and their impact on shadow economies in Europe," Policy Research Working Paper Series 5913, The World Bank.
  2. Peter Elek & Janos Kollo & Balazs Reizer & Peter A. Szabo, 2012. "Detecting Wage Under-Reporting Using a Double Hurdle Model," Budapest Working Papers on the Labour Market 1201, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Tonin, Mirco, 2011. "Underreporting of Earnings and the Minimum Wage Spike," IZA Discussion Papers 5942, Institute for the Study of Labor (IZA).
  4. Elek, Peter & Kollo, Janos & Reizer, Balázs & Szabó, Péter A., 2011. "Detecting Wage Under-reporting Using a Double Hurdle Model," IZA Discussion Papers 6224, Institute for the Study of Labor (IZA).
  5. Basu, Arnab K. & Chau, Nancy & Siddique, Zahra, 2011. "Tax Evasion, Minimum Wage Non-Compliance and Informality," IZA Discussion Papers 6228, Institute for the Study of Labor (IZA).
  6. Frías, Judith A & Kumler, Todd & Verhoogen, Eric A, 2013. "Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico," CEPR Discussion Papers 9622, C.E.P.R. Discussion Papers.
  7. Pickhardt, Michael & Prinz, Aloys, 2014. "Behavioral dynamics of tax evasion – A survey," Journal of Economic Psychology, Elsevier, vol. 40(C), pages 1-19.
  8. Ogndal, Tone, 2012. "In the Shadow of the Labour Market," Memorandum 05/2012, Oslo University, Department of Economics.
  9. Bernd Fitzenberger, 2008. "Anmerkungen zur Mindestlohndebatte: Elastizitäten, Strukturparameter und Topfschlagen," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(11), pages 21-27, 06.
  10. Szilvia Hamori & Anna Lovasz, 2011. "Can a fifty percent increase in public sector wages improve the position of public sector employees in the long run? An assessment of the public-private income gap in Hungary," Budapest Working Papers on the Labour Market 1106, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  11. Andras Simonovits, 2009. "When and How to Subsidize Tax-Favored Retirement Accounts?," IEHAS Discussion Papers 0902, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  12. Lars Calmfors & Giancarlo Corsetti & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Ákos Valentinyi & Xavier Vives, 2012. "Chapter 5: The Hungarian Crisis," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 115-130, 02.
  13. Kamila Fialová & Martina Mysíková, 2009. "The Minimum Wage: Labor Market Consequences in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(3), pages 255-274, August.
  14. Leibfritz, Willi, 2011. "Undeclared economic activity in central and eastern Europe -- how taxes contribute and how countries respond to the problem," Policy Research Working Paper Series 5923, The World Bank.

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