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Underground Activities and Labour Market Performance


  • Larsen, Birthe

    () (Department of Economics, Copenhagen Business School)

  • Kolm, Ann-Sofie

    (Department of Economics, Stockholm University)


This paper develops a general equilibrium search and matching model where an underground economy co-exists along with the formal part of the economy. In analyzing how tax and punishment policies a¤ect labour market performance, we nd that punishment of infor- mal sector activities induce workers and rms to reallocate towards the formal sector. However, more importantly, we nd that this real- location tends to improve e¢ ciency in search, reduce the overall wage pressure, and reduce actual unemployment.

Suggested Citation

  • Larsen, Birthe & Kolm, Ann-Sofie, 2010. "Underground Activities and Labour Market Performance," Working Papers 05-2010, Copenhagen Business School, Department of Economics.
  • Handle: RePEc:hhs:cbsnow:2010_005

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    More about this item


    Tax evasion; Underground economy; matching; unemployment;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search


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