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A Matching Model of Endogenous Growth and Underground Firms

  • Gaetano Lisi
  • Maurizio Pugno

A matching model will explain both unemployment and economic growth by considering the underground sector and human capital. Three problems can thus be simultaneously accounted for: (i) the persistence of the underground sector, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. Key assumptions are that entrepreneurial ability is heterogeneous, skill accumulation determines productivity growth, job-seekers choose whether to invest in education. The conclusions are that the least able entrepreneurs, whose number is endogenous, set up underground firms, employ unskilled labour, and do not contribute to growth. If the monitoring rate is sufficiently low, underground employment alleviates unemployment, but the economy grows at lower rates.

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Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2012_03.

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Date of creation: 03 Jan 2012
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Handle: RePEc:eei:rpaper:eeri_rp_2012_03
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  1. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
  2. Gaetano Lisi & Maurizio Pugno, 2009. "Entrepreneurship and the Hidden Economy: an Extended Matching Model," Working Papers 2009-04, Universita' di Cassino, Dipartimento di Scienze Economiche.
  3. Ann-Sofie Kolm & Birthe Larsen, 2003. "Wages, Unemployment, and the Underground Economy," CESifo Working Paper Series 1086, CESifo Group Munich.
  4. Maxim Bouev, 2002. "Official Regulations and the Shadow Economy: A Labour Market Approach," William Davidson Institute Working Papers Series 524, William Davidson Institute at the University of Michigan.
  5. Tito Boeri & Pietro Garibaldi, . "Shadow Activity and Unemployment in a Depressed Labor Market," Working Papers 177, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May.
  7. Rita Cappariello & Roberta Zizza, 2009. "Dropping the books and working off the books," Temi di discussione (Economic working papers) 702, Bank of Italy, Economic Research and International Relations Area.
  8. Kolml, Ann-Sofie & Larsen, Birthe, 2010. "The Black Economy and Education," Research Papers in Economics 2010:3, Stockholm University, Department of Economics.
  9. Tripier, Fabien, 2006. "Sticky prices, fair wages, and the co-movements of unemployment and labor productivity growth," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2749-2774, December.
  10. Benhabib, Jess & Spiegel, Mark M., 1994. "The role of human capital in economic development evidence from aggregate cross-country data," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 143-173, October.
  11. Decreuse, Bruno & Granier, Pierre, 2007. "Matching frictions and the divide of schooling investment between general and specific skills," MPRA Paper 6948, University Library of Munich, Germany.
  12. Laing, Derek & Palivos, Theodore & Wang, Ping, 1995. "Learning, Matching and Growth," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 115-29, January.
  13. Carillo, Maria Rosaria & Pugno, Maurizio, 2004. "The underground economy and underdevelopment," Economic Systems, Elsevier, vol. 28(3), pages 257-279, September.
  14. Hoon, Hian Teck & Phelps, Edmund S., 1997. "Growth, wealth and the natural rate: Is Europe's jobs crisis a growth crisis?," European Economic Review, Elsevier, vol. 41(3-5), pages 549-557, April.
  15. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
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