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Detecting Wage Under-Reporting Using a Double Hurdle Model

  • Peter Elek

    (E”tv”s Lor nd University, Department of Econonomics)

  • Janos Kollo

    ()

    (Institute of Economics of the Hungarian Academy of Sciences)

  • Balazs Reizer

    (Central European University)

  • Peter A. Szabo

    (Reformed Presbyterian Church of Central and Eastern Europe)

We estimate a double hurdle (DH) model of the Hungarian wage distribution assuming censoring at the minimum wage and wage under-reporting (i.e. compensation consisting of the minimum wage, subject to taxation, and an unreported cash supplement). We estimate the probability of under-reporting for minimum wage earners, simulate their genuine earnings and classify them and their employers as 'cheaters' and 'non-cheaters'. In the possession of the classification we check how cheaters and non-cheaters reacted to the introduction of a minimum social security contribution base, equal to 200 per cent of the minimum wage, in 2007. The findings suggest that cheaters were more likely to raise the wages of their minimum wage earners to 200 per cent of the minimum wage thereby reducing the risk of tax audit. Cheating firms also experienced faster average wage growth and slower output growth. The results suggest that the DH model is able to identify the loci of wage under-reporting with some precision.

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Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series Budapest Working Papers on the Labour Market with number 1201.

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Date of creation: Jan 2012
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Handle: RePEc:has:bworkp:1201
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  1. Mirco Tonin, 2009. "Minimumwage and tax evasion: theory and evidence," MNB Working Papers 2009/2, Magyar Nemzeti Bank (the central bank of Hungary).
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  14. Jaanika Merik�ll & Karsten Staehr, 2010. "Unreported Employment and Envelope Wages in Mid-Transition: Comparing Developments and Causes in the Baltic Countries," Comparative Economic Studies, Palgrave Macmillan, vol. 52(4), pages 637-670, December.
  15. Richard Dickens & Stephen Machin & Alan Manning, 1994. "The Effects of Minimum Wages on Employment: Theory and Evidence from the US," NBER Working Papers 4742, National Bureau of Economic Research, Inc.
  16. María Engracia ROCHINA-BARRACHINA, 1999. "A New Estimator for Panel Data Sample Selection Models," Annales d'Economie et de Statistique, ENSAE, issue 55-56, pages 153-181.
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  18. Labeaga, Jose M., 1999. "A double-hurdle rational addiction model with heterogeneity: Estimating the demand for tobacco," Journal of Econometrics, Elsevier, vol. 93(1), pages 49-72, November.
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