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Utility-Based Estimation of Labor Supply Functions in the Regular and Irregular Sectors

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  • Lacroix, G.
  • Fortin, B.

Abstract

Recent theoretical work on labor supply has shown that the tax and transfer system can induce some individuals to work in the irregular labor market. Models designed to represent such behavior are unable to sign unambiguously the impact of the marginal tax rate as well as many key exogenous parameters on the hours supplied in the irregular market except under strong restrictions on preferences. In this paper, the authors estimate a simultaneous labor supply model that allows testing some of the more common assumptions found in the literature, using a unique data set on the underground economy of the metropolitan area of Quebec City, Canada. Estimates of elasticities with respect to predetermined variables are presented. Moreover, they test and empirically reject the assumptions of perfect substitution between regular and irregular work activities as well as additive separability of the utility function. Copyright 1992 by Royal Economic Society.
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Suggested Citation

  • Lacroix, G. & Fortin, B., 1991. "Utility-Based Estimation of Labor Supply Functions in the Regular and Irregular Sectors," Cahiers de recherche 9020, Université Laval - Département d'économique.
  • Handle: RePEc:lvl:laeccr:9020
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    Cited by:

    1. Guy Lacroix & Nadia Joubert & Bernard Fortin, 2004. "Offre de travail au noir en présence de la fiscalité et des contrôles fiscaux," Économie et Prévision, Programme National Persée, vol. 164(3), pages 145-163.
    2. François Gardes & Christophe Starzec, 2009. "Polish Households' Behavior in the Regular and Informal Economies," Revue économique, Presses de Sciences-Po, vol. 60(5), pages 1181-1210.
    3. Filer, Randall K. & Hanousek, Jan & Lichard, Tomáš & Torosyan, Karine, 2016. ""Flattening" the Tax Evasion: Evidence from the Post-Communist Natural Experiment," CEPR Discussion Papers 11229, C.E.P.R. Discussion Papers.
    4. Lemieux, Thomas, 1997. "Choix occupationnels et offre de travail lorsque les salaires sont fonction des heures travaillées," L'Actualité Economique, Société Canadienne de Science Economique, vol. 73(1), pages 99-128, mars-juin.
    5. Daniel J. Phaneuf & Catherine L. Kling & Joseph A. Herriges, 2000. "Estimation and Welfare Calculations in a Generalized Corner Solution Model with an Application to Recreation Demand," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 83-92, February.
    6. Fortin, Bernard & Lacroix, Guy & Montmarquette, Claude, 2000. "Are Underground Workers More Likely to be Underground Consumers?," Economic Journal, Royal Economic Society, vol. 110(466), pages 838-860, October.
    7. Barth, Erling & Ognedal, Tone, 2005. "Unreported Labour," IZA Discussion Papers 1893, Institute for the Study of Labor (IZA).
    8. Bernard Fortin & Nadia Joubert & Guy Lacroix, 2002. "Fiscalité, effets de voisinage et offre de travail au noir," Post-Print halshs-00178184, HAL.
    9. Bernard Fortin, 2002. "Les enjeux de l'économie souterraine," CIRANO Working Papers 2002s-89, CIRANO.
    10. Guy Lacroix & Natalia Radtchenko, 2011. "The changing intra-household resource allocation in Russia," Journal of Population Economics, Springer;European Society for Population Economics, vol. 24(1), pages 85-106, January.
    11. Karine Torosyan & Randall K. Filer, 2014. "Tax reform in Georgia and the size of the shadow economy," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 22(1), pages 179-210, January.
    12. Gunter, Samara, 2013. "State Earned Income Tax Credits and Participation in Regular and Informal Work," National Tax Journal, National Tax Association, vol. 66(1), pages 33-62, March.
    13. Frederiksen, Anders & Graversen, Ebbe Krogh & Smith, Nina, 2005. "Tax evasion and work in the underground sector," Labour Economics, Elsevier, vol. 12(5), pages 613-628, October.
    14. Roff, Jennifer & Lugo-Gil, Julieta, 2012. "A model of child support and the underground economy," Labour Economics, Elsevier, vol. 19(5), pages 668-681.
    15. Erling Eide & Kristine von Simson & Steinar Strøm, 2011. "Rank-Dependent Utility, Tax Evasion, and Labor Supply," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(3), pages 261-281, September.
    16. Catalina Granda-Carvajal, 2012. "Macroeconomic Implications of the Underground Sector: Challenging the Double Business Cycle Approach," Economic Analysis and Policy, Elsevier, vol. 42(2), pages 237-256, September.
    17. Jørgensen, Øystein & Ognedal, Tone & Strøm, Steinar, 2005. "Labor supply when tax evasion is an option," Memorandum 06/2005, Oslo University, Department of Economics.
    18. Lauren M. Rich & Sun-Bin Kim, 2001. "Taxes and Unmarried Fathers' Participation in the Underground Economy," Working Papers 970, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Research on Child Wellbeing..
    19. Mukherji, Nivedita, 2004. "Government policies and graft in an economy with endogenous labor supply," Journal of Development Economics, Elsevier, vol. 73(1), pages 423-434, February.
    20. Razzolini, Tiziano, 2006. "Study on labor supply when tax evasion is an option with Box-Cox functional forms and random parameters," Memorandum 25/2006, Oslo University, Department of Economics.
    21. repec:kap:jecinq:v:15:y:2017:i:4:d:10.1007_s10888-017-9369-3 is not listed on IDEAS
    22. Maxim Bouev, 2001. "Labor Supply, Informal Economy and Russian Transition," William Davidson Institute Working Papers Series 408, William Davidson Institute at the University of Michigan.

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    Keywords

    labour market ; taxation ; uncertainty ; behaviour;

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