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Minimum Wage and Tax Evasion: Theory and Evidence

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Author Info
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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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number wp865.

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

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Related research
Keywords: MinimumWage Tax Evasion Wage Distribution Hungary

Other versions of this item:

Find related papers by JEL classification:
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
P2 - Economic Systems - - Socialist Systems and Transition Economies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Richard Dickens & Alan Manning, 2004. "Spikes and spill-overs: The impact of the national minimum wage on the wage distribution in a low-wage sector," Economic Journal, Royal Economic Society, vol. 114(494), pages C95-C101, 03. [Downloadable!] (restricted)
  2. Lindsay M. Tedds, 2004. "Nonparametric expenditure-based estimation of income under-reporting and the underground economy," Department of Economics Working Papers 2004-17, McMaster University. [Downloadable!]
  3. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March. [Downloadable!] (restricted)
  5. Panayiota Lyssiotou & Panos Pashardes & Thanasis Stengos, 2004. "Estimates of the black economy based on consumer demand approaches," Economic Journal, Royal Economic Society, vol. 114(497), pages 622-640, 07. [Downloadable!] (restricted)
  6. Jonathan S. Feinstein, 1991. "An Econometric Analysis of Income Tax Evasion and its Detection," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 14-35, Spring. [Downloadable!] (restricted)
  7. Klepper, Steven & Nagin, Daniel, 1989. "The Anatomy of Tax Evasion," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 1-24, Spring.
  8. Sara Lemos, 2006. "A Survey of the Effects of the Minimum Wage on Prices," Discussion Papers in Economics 06/9, Department of Economics, University of Leicester. [Downloadable!]
    Other versions:
  9. James Andreoni & Brian Erard & Jonathan Feinstein, 1998. "Tax Compliance," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 818-860, June. [Downloadable!] (restricted)
  10. Mirco, Tonin, 2006. "The Effects of the Minimum Wage in an Economy with Tax Evasion," Seminar Papers 747, Stockholm University, Institute for International Economic Studies. [Downloadable!]
  11. Kolm, Ann-Sofie & Nielsen, Søren Bo, 2005. "Under-reporting of Income and Labor Market Performance," Research Papers in Economics 2005:5, Stockholm University, Department of Economics. [Downloadable!]
  12. Carlo V Fiorio & Francesco D'Amuri, 2005. "Workers' Tax Evasion in Italy," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 247-270, November. [Downloadable!]
  13. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June. [Downloadable!] (restricted)
  14. Cowell, Frank A., 1985. "Tax evasion with labour income," Journal of Public Economics, Elsevier, vol. 26(1), pages 19-34, February. [Downloadable!] (restricted)
  15. Kertesi, Gábor & Köllo, János, 2003. "Fighting “Low Equilibria” by Doubling the Minimum Wage? Hungary’s Experiment," IZA Discussion Papers 970, Institute for the Study of Labor (IZA). [Downloadable!]
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  16. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  17. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January. [Downloadable!] (restricted)
  18. Dickens, Richard & Alan Manning, 2003. "The Impact of the National Minimum Wage on the Wage Distribution in a Low-Wage Sector," Royal Economic Society Annual Conference 2003 60, Royal Economic Society. [Downloadable!]
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