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Detecting Wage Under-reporting Using a Double Hurdle Model

Author

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  • Elek, Peter

    (Eötvös Lorand University)

  • Köllő, János

    (Institute of Economics, Budapest)

  • Reizer, Balázs

    (Centre for Economic and Regional Studies)

  • Szabó, Péter A.

    (Reformed Presbyterian Church of Central and Eastern Europe)

Abstract

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.

Suggested Citation

  • Elek, Peter & Köllő, János & Reizer, Balázs & Szabó, Péter A., 2011. "Detecting Wage Under-reporting Using a Double Hurdle Model," IZA Discussion Papers 6224, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp6224
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    1. Detection of wage under-reporting
      by Economic Logician in Economic Logic on 2012-01-24 21:32:00

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    Cited by:

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    2. Aljoša Feldina & Sašo Polanec, 2012. "Underreporting and Minimum Wage," LICOS Discussion Papers 32412, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    3. Paulus, Alari, 2015. "Tax evasion and measurement error: An econometric analysis of survey data linked with tax records," ISER Working Paper Series 2015-10, Institute for Social and Economic Research.
    4. Péter Elek & János Köllő, 2019. "Eliciting permanent and transitory undeclared work from matched administrative and survey data," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(3), pages 547-576, August.
    5. Todd Kumler & Eric Verhoogen & Judith Frías, 2020. "Enlisting Employees in Improving Payroll Tax Compliance: Evidence from Mexico," The Review of Economics and Statistics, MIT Press, vol. 102(5), pages 881-896, December.
    6. World Bank, 2013. "Minimum Wage Policy : Lessons with a Focus on the ASEAN Region," World Bank Publications - Reports 16687, The World Bank Group.
    7. Köllö, János & Boza, István & Balázsi, László, 2021. "Wage gains from foreign ownership: evidence from linked employer-employee data," Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 55, pages 1-3.
    8. Gavoille, Nicolas & Zasova, Anna, 2023. "Minimum wage spike and income underreporting: A back-of-the-envelope-wage analysis," Journal of Comparative Economics, Elsevier, vol. 51(1), pages 372-402.
    9. Gergely Baksay & Balázs Csomós, 2015. "Analysis of the Changes in the Hungarian Tax System and Social Transfers between 2010 and 2014 Using a Behavioural Microsimulation Model," Society and Economy, Akadémiai Kiadó, Hungary, vol. 37(supplemen), pages 29-64, December.
    10. Lovász, Anna & Altwicker-Hámori, Szilvia, 2013. "A köz- és a magánszféra kereseti különbségei Magyarországon, 2002-2008. Javíthat-e hosszú távon a közalkalmazottak relatív helyzetén egy 50 százalékos béremelés? [An assessment of Hungary s public/," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(5), pages 500-522.
    11. Svraka, András, 2021. "Recent trends in income inequalities in Hungary using administrative data," Taxation Working Papers 8, Ministry of Finance, Department of Tax Policy and International Taxation.
    12. Bíró, Anikó & Prinz, Dániel & Sándor, László, 2022. "The minimum wage, informal pay, and tax enforcement," Journal of Public Economics, Elsevier, vol. 215(C).
    13. Balázs Reizer, 2015. "Do Firms Pay Bonuses to Protect Jobs?," CEU Working Papers 2015_6, Department of Economics, Central European University.
    14. Balazs Reizer, 2016. "Do Firms Pay Bonuses to Protect Jobs?," CERS-IE WORKING PAPERS 1612, Institute of Economics, Centre for Economic and Regional Studies.
    15. Laszlo Gulyas & Tamás Mahr & Istvan Janos Toth, 2015. "Factors to Curb Tax Evasion: Evidences from the TAXSIM Agent-Based Simulation Model," CERS-IE WORKING PAPERS 1521, Institute of Economics, Centre for Economic and Regional Studies.

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    More about this item

    Keywords

    double hurdle model; tax evasion; Hungary;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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