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The Underground Labor Market between Social Norms and Economic Inventives


  • Luigi Bonaventura

    (Department of Labor Studies, University of Milan, Italy)


– This paper examines the phenomenon of the underground economy. We analyze the choice by firms and workers to carry out their economic activities within the formal economy context (regular economy) or the underground economy context (irregular economy). We assume that there are two types of labor markets, a regular one, and a irregular one; and starting from a coordinated interaction between the firm and the worker we show the existence of multiple symmetric equilibria in each market. The proposed game of coordination (2x2), can be interpreted as a pre-contract interaction between the agents through which they determine in which labor market they will “meet”. In the model, we insert an exogenous policy parameter (t) that measures the impact of legislative policy interventions on the regular labor market. The parameter takes on a positive value with respect to those interventions that increase the incentives to operate in the regular market. Through the utilization of evolutionary dynamics we can explicate the mechanism that leads the system towards one of the two equilibria, and explain the fact that these equilibria are sustained among the different populations (firms and workers) by taking on the role of a social norm. In this framework, we show that policy interventions (t) do not alter the choice dynamics of each actor, nor do they eliminate the probability of having certain dynamics that push the system towards the underground market, even where there are strong incentives for acting in the regular economy.

Suggested Citation

  • Luigi Bonaventura, 2005. "The Underground Labor Market between Social Norms and Economic Inventives," Labor and Demography 0501008, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpla:0501008
    Note: Type of Document - pdf; pages: 12

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    References listed on IDEAS

    1. Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2001. "Social Norms and Optimal Incentives in Firms," Working Paper Series 565, Research Institute of Industrial Economics.
    2. Axelrod, Robert, 1986. "An Evolutionary Approach to Norms," American Political Science Review, Cambridge University Press, vol. 80(4), pages 1095-1111, December.
    3. George A. Akerlof, 1980. "A Theory of Social Custom, of which Unemployment may be One Consequence," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 749-775.
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    More about this item


    Underground Labor Market; Social Norms; Evolutionary Games; Policy Incentives;

    JEL classification:

    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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