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Social security driven Tax wedge and its effects on Employment and Shadow Employment

Author

Listed:
  • Marek Gora
  • Oleksandr Rohozynsky
  • Irina Sinitsina
  • Mateusz Walewski

Abstract

The aim of this paper was to analyse possible directions and magnitudes of the relationship between the social security driven tax wedge, employment and shadow employment in Russia and Ukraine. Previous results suggest a limited positive relationship between the size of the tax wedge and shadow employment and in recent years both analysed countries undertook serious steps in order to reform and to simplify their payroll tax system and consequently to reduce shadow employment. Our result suggest that the unskilled persons engaged in unregistered jobs in Ukraine and Russia are not "rewarded" with higher net earnings. It seems that, in their case, shadow employment is the way to escape unemployment and resulting poverty, rather than to evade taxes. Hence, it seems that, in this case, broadening of general employment opportunities for this group would result in a decrease in shadow employment. We also found that the effect of the SSN benefits on shadow employment was rather low in both countries. One of the explanations is the fact that SSN benefits remain largely universal, and are not sufficiently tied to former employment history and social security contribution paid.

Suggested Citation

  • Marek Gora & Oleksandr Rohozynsky & Irina Sinitsina & Mateusz Walewski, 2009. "Social security driven Tax wedge and its effects on Employment and Shadow Employment," CASE Network Studies and Analyses 0398, CASE-Center for Social and Economic Research.
  • Handle: RePEc:sec:cnstan:0398
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    Keywords

    tax wedge; employment; shadow employment; transition economies;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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