Shadow Activity and Unemployment in a Depressed Labour Market
This Paper studies the border between shadow employment and unemployment. It argues that the two macroeconomic phenomena are two faces of the same coin: any policy aimed at reducing the former will increase the latter. Theoretically, it proposes and solves a matching model of the labour market, where shadow employment emerges in equilibrium as the endogenous response of firms and workers who felt overburdened by taxes and regulations. While the model we propose neatly rationalizes the labour market trade-off implied by ‘shadow reducing policies’, it suggests that economies with low unemployment turnover should be characterized also by low turnover along the shadow margins. Since existing estimates of shadow employment are silent on labour market flows and on the relation between shadow activity and the main labour market aggregates, we perform original empirical work on the border between employment, unemployment and inactivity, and we find that Italian shadow employment has longer duration in regions with lower unemployment turnover. We also find support to the substantive assumptions of the model.
|Date of creation:||Jun 2002|
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- Kolm, Ann-Sofie & Larsen, Birthe, 2001.
"Wages, Unemployment, and the Underground Economy,"
Working Paper Series
2001:8, Uppsala University, Department of Economics.
- Ann-Sofie Kolm & Birthe Larsen, 2003. "Wages, Unemployment, and the Underground Economy," CESifo Working Paper Series 1086, CESifo Group Munich.
- Kolm, Anne-Sofie & Larsen, Birthe, 2003. "Wages, unemployment, and the underground economy," Working Papers 11-2003, Copenhagen Business School, Department of Economics.
- Kolm, A.S. & Larsen, B., 2001. "Wages, Unemployment, and the Underground Economy," Papers 2001:08, Uppsala - Working Paper Series.
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- Garibaldi, Pietro, 2004. "Search Unemployment With Advance Notice," Macroeconomic Dynamics, Cambridge University Press, vol. 8(01), pages 51-75, February.
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- Gilles Saint-Paul, 1995. "The High Unemployment Trap," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 527-550.
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