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Department of Economics, Stockholm University Research Papers in Economics, Department of Economics, Stockholm University

No 2005:5:
Under-reporting of Income and Labor Market Performance

Ann-Sofie Kolm () and Søren Bo Nielsen ()

Abstract: To examine the effects on labor market performance of government tax and enforcement policies, this paper develops an equilibrium model featuring tax evasion, matching frictions, and worker-firm wage bargains. In the wage bargains, workers and firms can agree on the amount of remuneration that should not be reported to the tax authorities. We find that increased taxation actually reduces unemployment, whereas more zealous enforcement has the opposite effect.

Keywords: Unemployment; matching; wage bargaining; tax evasion; (follow links to similar papers)

JEL-Codes: H26; J41; J64; (follow links to similar papers)

27 pages, June 15, 2005

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