Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 10-2007: Under-reporting of income and Labour Market Performance

Ann-Sofie Kolm and Søren Bo Nielsen
Additional contact information
Ann-Sofie Kolm: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
Søren Bo Nielsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark

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: na

JEL-codes: E01; F16

31 pages, January 1, 2007

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