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Undeclared Work And Wage Inequality

Author

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  • Leandro Elia

    ()

  • Edoardo Di Porto

    () (Dipartimento di Economia e Statistica, Università della Calabria)

Abstract

In this paper we study how undeclared work affects the wages of undeclared and declared workers and in particular the declared wage inequality. Using individual data on Italy in the years 2000-2004, we compute a cross and own labor demand elasticity for undeclared and declared work. We provide an identification strategy relying on Italian amnesty tax laws in 2002. Such laws have changed the shape of Italian undeclared sector causing a quick emersion of undeclared workers. Our results based on a set of 2SLS regressions suggest that undeclared work: 1) decreases declared wages, 2) adversely affects undeclared wages and 3) raises wage inequality in the declared sector. Undeclared work competes more with least skilled jobs, while do not affect high skilled jobs. We found complementarity between undeclared workers and medium skills jobs. As a consequence reducing undeclared work decreases wage inequality as well as it decreases the earnings in medium skill sectors. This result suggests that undertaking reducing undeclared labor-policy might encounter resistance because of welfare loss of the medium class of workers.

Suggested Citation

  • Leandro Elia & Edoardo Di Porto, 2011. "Undeclared Work And Wage Inequality," Working Papers 201108, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
  • Handle: RePEc:clb:wpaper:201108
    as

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    File URL: http://www.ecostat.unical.it/RePEc/WorkingPapers/WP08_2011.pdf
    File Function: First version, 2011-08
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    References listed on IDEAS

    as
    1. Tito Boeri & Pietro Garibaldi, 2005. "Shadow Sorting," NBER Chapters,in: NBER International Seminar on Macroeconomics 2005, pages 125-163 National Bureau of Economic Research, Inc.
    2. Tito Boeri & Pietro Garibaldi, "undated". "Shadow Activity and Unemployment in a Depressed Labor Market," Working Papers 177, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Edoardo Di Porto, 2011. "Undeclared Work, Employer Tax Compliance, and Audits," Public Finance Review, , vol. 39(1), pages 75-102, January.
    4. Friedrich Schneider, 2000. "The Increase of the Size of the Shadow Economy of 18 OECD Countries: Some Preliminary Explanations," CESifo Working Paper Series 306, CESifo Group Munich.
    5. 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 231-254, March.
    6. Daron Acemoglu & David H. Autor & David Lyle, 2004. "Women, War, and Wages: The Effect of Female Labor Supply on the Wage Structure at Midcentury," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 497-551, June.
    7. Rita Cappariello & Roberta Zizza, 2010. "Dropping the Books and Working Off the Books," LABOUR, CEIS, vol. 24(2), pages 139-162, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Elasticity of labor demand; Undeclared labor; Wage inequality;

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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