Scandinavian Working Papers in Economics

Working Papers,
Copenhagen Business School, Department of Economics

No 05-2010: Underground Activities and Labour Market Performance

Birthe Larsen () and Ann-Sofie Kolm
Additional contact information
Birthe Larsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Porcelænshaven 16 A, 1, DK-2000 Frederiksberg, Denmark
Ann-Sofie Kolm: Department of Economics, Stockholm University

Abstract: This paper develops a general equilibrium search and matching model where an underground economy co-exists along with the formal part of the economy. In analyzing how tax and punishment policies a¤ect labour market performance, we nd that punishment of infor- mal sector activities induce workers and rms to reallocate towards the formal sector. However, more importantly, we nd that this real- location tends to improve e¢ ciency in search, reduce the overall wage pressure, and reduce actual unemployment.

Keywords: Tax evasion; Underground economy; matching; unemployment

JEL-codes: H24; H26; J64

18 pages, May 28, 2010

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