Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 01-2001: MORAL COSTS, THE INFORMAL SECTOR AND UNEMPLOYMENT

Ann-Sofie Kolm and Birthe Larsen
Additional contact information
Ann-Sofie Kolm: Uppsala University, Postal: Uppsala University, IFAU, CIM
Birthe Larsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

Abstract: While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. The same good is produced in the formal and in the informal sector. Moral considerations are determinant for whether the worker search for jobs in the formal or in the informal sector. We analyse the impact of higher punishment fees and a higher audit rate on wages, sector division, unemployment and welfare.

Keywords: Employment; Unemployment; Wages; Macroeconomics

JEL-codes: E20; E24

18 pages, January 22, 2001

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