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Wages, unemployment, and the underground economy

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  • Kolm, Anne-Sofie

    (Department of Economics, Copenhagen Business School)

  • Larsen, Birthe

    (Department of Economics, Copenhagen Business School)

Abstract

While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Workers search for jobs in both the formal and the informal sector. We analyse the impact of higher punishment rates and a higher audit rate on labour market performance. We find that a higher punishment rate reduces the size of the informal sector and reduces unemployment. A higher audit rate has an ambiguous impact on unemployment, and may actually increase the size of the underground economy.

Suggested Citation

  • Kolm, Anne-Sofie & Larsen, Birthe, 2003. "Wages, unemployment, and the underground economy," Working Papers 11-2003, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2003_011
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    More about this item

    Keywords

    Tax evasion; underground economy; matching; bargaining; unemployment;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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