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What we pay in the shadows: Labor tax evasion, minimum wage hike and employment

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  • Gavoille, Nicolas
  • Zasova, Anna

Abstract

The interactions between minimum wage policy and tax evasion remain largely unknown. We study the firm-level employment effects of a large and biting minimum wage increase in the context of widespread wage underreporting. We apply machine learning to classify firms as either tax-compliant or tax-evading. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results indicate that these firms use wage underreporting as an adjustment margin, converting part of their formerly undeclared cash payments into official wages. Increasing the minimum wage improves tax enforcement, but comes at the cost of negative employment consequences for compliant firms.

Suggested Citation

  • Gavoille, Nicolas & Zasova, Anna, 2023. "What we pay in the shadows: Labor tax evasion, minimum wage hike and employment," Journal of Public Economics, Elsevier, vol. 228(C).
    • Handle: RePEc:eee:pubeco:v:228:y:2023:i:c:s0047272723002098
    DOI: 10.1016/j.jpubeco.2023.105027
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    Cited by:

    1. Bíró, Anikó & Prinz, Dániel & Sándor, László, 2022. "The minimum wage, informal pay, and tax enforcement," Journal of Public Economics, Elsevier, vol. 215(C).
    2. Garcia-Louzao, Jose & Tarasonis, Linas, 2023. "Wage and Employment Impact of Minimum Wage: Evidence from Lithuania," Journal of Comparative Economics, Elsevier, vol. 51(2), pages 592-609.
    3. Konstantins Beņkovskis & Ludmila Fadejeva & Anna Pluta & Anna Zasova, 2024. "Keeping the Best of Two Worlds: Linking CGE and Microsimulation Models for Policy Analysis," International Journal of Microsimulation, International Microsimulation Association, vol. 17(1), pages 122-144.
    4. Han, Jiabin & Zhang, Miao & Long, Jiale, 2024. "Minimum wage standards and corporate short-term and long-term investment preferences," Finance Research Letters, Elsevier, vol. 67(PB).
    5. Gavoille, Nicolas & Zasova, Anna, 2023. "Minimum wage spike and income underreporting: A back-of-the-envelope-wage analysis," Journal of Comparative Economics, Elsevier, vol. 51(1), pages 372-402.
    6. Anikó Bíró & Péter Elek & Dániel Prinz & László Sándor, 2024. "Tax evasion and the contribution-benefit link: the case of maternity benefits," IFS Working Papers W24/57, Institute for Fiscal Studies.
    7. Gavoille, Nicolas & Zasova, Anna, 2021. "Foreign ownership and labor tax evasion: Evidence from Latvia," Economics Letters, Elsevier, vol. 207(C).
    8. Clemens, Jeffrey & Strain, Michael R., 2022. "Understanding “Wage Theft”: Evasion and avoidance responses to minimum wage increases," Labour Economics, Elsevier, vol. 79(C).
    9. Gazilas, Emmanouil Taxiarchis, 2024. "An empirical analysis on the impact of labour market regulations on uninsured employment in Greece," MPRA Paper 121311, University Library of Munich, Germany.
    10. Konstantins Benkovskis & Olegs Matvejevs, 2023. "The New Version of Latvian CGE Model," Working Papers 2023/02, Latvijas Banka.
    11. Nicolas Gavoille, 2025. "A short drop or a sudden stop? Sanctions, trade shocks, and firms' adjustment margins," Working Papers 2025/03, Latvijas Banka.
    12. Clemens, Jeffrey & Strain, Michael R., 2023. "Does Wage Theft Vary by Demographic Group? Evidence from Minimum Wage Increases," IZA Discussion Papers 16550, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Minimum wage; Employment; Tax evasion;
    All these keywords.

    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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