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Institute for International Economic Studies, Stockholm University Seminar Papers, Institute for International Economic Studies, Stockholm University

No 747:
The Effects of the Minimum Wage in an Economy with Tax Evasion

Tonin Mirco ()

Abstract: A model of the labor market is built where imperfect detection in case of auditing induces underreporting of earnings. The introduction of the minimum wage makes some workers increase compliance, boosting fiscal revenues. A spike at the minimum wage level appears in the distribution of earnings. The model predicts a positive correlation between the size of the spike at the minimum wage level and the size of the informal economy. Empirical evidence supporting this prediction is presented.

Keywords: minimum wage; tax evasion; (follow links to similar papers)

JEL-Codes: H26; H32; J38; (follow links to similar papers)

48 pages, September 22, 2006

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