Working Paper Series, Department of Economics, Copenhagen Business School
Anne-Sofie Kolm and Birthe Larsen
Wages, unemployment, and the underground economy
Abstract: While examining the macroeconomic effects of increased
government control of the informal sector, this paper develops a two-sector
general equilibrium model featuring matching frictions and worker-firm wage
bargaining. Workers search for jobs in both the formal and the informal
sector. We analyse the impact of higher punishment rates and a higher audit
rate on labour market performance. We find that a higher punishment rate
reduces the size of the informal sector and reduces unemployment. A higher
audit rate has an ambiguous impact on unemployment, and may actually
increase the size of the underground economy.
Keywords: Tax evasion; underground economy; matching; bargaining; unemployment; (follow links to similar papers)
JEL-Codes: H26; (follow links to similar papers)
32 pages, October 20, 2003
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