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Million Dollar Baby: Should Parental Benefits Depend on Wages When the Payroll Tax Evasion is Present?

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  • Vitalijs Jascisens

    (HSE University)

  • Anna Zasova

    (Baltic International Centre for Economic Policy Studies (BICEPS))

Abstract

This paper explores the effect of tying social security benefits to declared wages on firm-worker collusion and strategic income reporting before the benefit entitlement. We use administrative data from Latvia covering the entire working population over a 15-year period from 1996 to 2010 to study generous parental benefits, which depend on the reported wage in the time period before the childbirth. Our analysis delivers three principal results. First, we observe a sharp increase in the wage during the time period taken into account to calculate parental benefits, and interpret the obtained result as a collusive legalization of previously unreported income with an aim to increase the future benefit. Depending on the specification, we conclude that during this period the wage on average increases by 5.4%-7.5%. Second, obtained effects are highly heterogeneous. We find that the wage growth is much higher in small firms, where it is presumably easier to sustain collusion between employees and employers. Finally, we demonstrate that legalization of wages is temporary and lasts only until the end of the period taken into account to calculate parental benefits.

Suggested Citation

  • Vitalijs Jascisens & Anna Zasova, 2021. "Million Dollar Baby: Should Parental Benefits Depend on Wages When the Payroll Tax Evasion is Present?," SSE Riga/BICEPS Research Papers 9, Baltic International Centre for Economic Policy Studies (BICEPS);Stockholm School of Economics in Riga (SSE Riga).
  • Handle: RePEc:bic:rpaper:9
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    References listed on IDEAS

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    Cited by:

    1. Nicolas Gavoille & Anna Zasova, 2021. "What we pay in the shadow: Labor tax evasion, minimum wage hike and employment," Working Papers CEB 21-017, ULB -- Universite Libre de Bruxelles.

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