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Minimum Wage and Tax Evasion: Theory and Evidence

  • Mirco Tonin


The paper investigates the role of the minimum wage in a competi- tive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low- productivity workers and transforms a nominally neutral ?scal system into a regressive one. A spike in the wage distribution at the mini- mum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose o¢ cially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction ?nds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.

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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp865.

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Length: pages
Date of creation: 01 Jan 2007
Date of revision:
Handle: RePEc:wdi:papers:2007-865
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  38. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
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