Scandinavian Working Papers in Economics

CLS Working Papers,
University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research

No 01-2: Tax Evasion and Work in the Underground Sector

Ebbe Krogh Graversen and Nina Smith ()
Additional contact information
Ebbe Krogh Graversen: Centre for Labour Market and Social Research, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Nina Smith: Centre for Labour Market and Social Research, Aarhus School of Business, Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark

Abstract: A bivariate random effect panel data model is estimated for labour supply in the taxable and the non-taxable sectors in Denmark. The results show that wage rates and non-labour income have significant effects on labour supply in both sectors. For men, income taxes seem to twist the labour supply away from taxed regular to untaxed underground supply. For men, the average own wage elasticity with respect to underground labour supply is 0.3 while the cross price elasticity from wages is -0.6 and the income elasticity is -0.1. For women the results are more mixed.

Keywords: Labour supply; Tax evasion; Censored bivariate panel data model.

JEL-codes: C33; C34; H26; J22

22 pages, June 27, 2002

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