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The Perverse Effect of Flexible Work Arrangements on Informality

Author

Listed:
  • Edoardo Di Porto
  • Pietro Garibaldi
  • Giovanni Mastrobuoni
  • Paolo Naticchioni

Abstract

Flexible work arrangements (FWAs) are often promoted as a means to regularise informal labour. Utilising unique Italian administrative data that links employer-employee records, daily voucher usage by firms, and randomly timed labour inspections (2014-2017), we demonstrate that FWAs can also hinder enforcement and increase undeclared work. We document that, upon inspection, some firms validate undeclared work with FWAs on the spot, raising the probability of FWA usage by 0.88 percentage points (18%) on average, with the largest increases occurring on the day of and the day after the inspection. A simple partial-equilibrium labour-demand model with heterogeneous tax morale rationalises these “on-the-spot” validations as an enforcement-avoidance margin. The post-inspection increase vanishes when firms are required to pre-notify the tax authority of their use of FWAs. Moreover, when FWAs are completely abolished, presumptive misusers substitute FWAs with temporary contracts.

Suggested Citation

  • Edoardo Di Porto & Pietro Garibaldi & Giovanni Mastrobuoni & Paolo Naticchioni, 2025. "The Perverse Effect of Flexible Work Arrangements on Informality," CESifo Working Paper Series 12115, CESifo.
    • Handle: RePEc:ces:ceswps:_12115
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    2. Katharina Pfeil & Matthias Kasper & Sarah Necker & Lars P. Feld, 2024. "Tax System Design, Tax Reform, and Labor Supply," CESifo Working Paper Series 11350, CESifo.
    3. Herget, Anna & Riphahn, Regina T., 2024. "Phasing Out Payroll Tax Subsidies," IZA Discussion Papers 17587, Institute of Labor Economics (IZA).
    4. Anna Herget & Regina T. Riphahn, 2024. "Phasing Out Payroll Tax Subsidies," CESifo Working Paper Series 11605, CESifo.
    5. Alessandra Casarico & Irene Ferrari & Caterina Pavese, 2025. "Rebalancing Power Asymmetries Within Firms: Evidence from Illegal Resignations," CESifo Working Paper Series 11805, CESifo.
    6. Fanfani Bernardo & Passerini Filippo, 2024. "Do Alternative Work Arrangements Substitute Standard Employment? Evidence from Worker-level Data," Working papers 085, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.

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    Keywords

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    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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