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Department of Economics, Copenhagen Business School Working Paper Series, Department of Economics, Copenhagen Business School

No 05-2010:
Underground Activities and Labour Market Performance

Birthe Larsen () and Ann-Sofie Kolm

Abstract: This paper develops a general equilibrium search and matching model where an underground economy co-exists along with the formal part of the economy. In analyzing how tax and punishment policies aect labour market performance, we nd that punishment of infor- mal sector activities induce workers and rms to reallocate towards the formal sector. However, more importantly, we nd that this real- location tends to improve e ciency in search, reduce the overall wage pressure, and reduce actual unemployment.

Keywords: Tax evasion; Underground economy; matching; unemployment; (follow links to similar papers)

JEL-Codes: H24; H26; J64; (follow links to similar papers)

18 pages, May 28, 2010

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