Working Paper Series, Department of Economics, Copenhagen Business School
Ann-Sofie Kolm and Birthe Larsen
Does Tax Evasion Affect Unemployment and Educational Choice?
Abstract: While examining the macroeconomic effects of government
tax and punishment policies, this paper develops a three-sector general
equilibrium model featuring matching frictions and worker-firm wage
bargaining. Workers are assumed to diﬀer in ability, and the choice
of education is determined endogenously. Job opportunities in an informal
sector are available only to workers who choose not to acquire higher
education. We find that increased punishment of informal activities
increases the number of educated workers and reduces the number of
unemployed workers. Considering welfare, we show it is optimal to choose
punishment rates so to more than fully counteract the distortion created by
the government’s inability to tax the informal sector.
Keywords: Tax evasion; underground economy; education; matching; unemployment.; (follow links to similar papers)
JEL-Codes: H26; I21; J64; (follow links to similar papers)
36 pages, November 12, 2006
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