Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

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

Ann-Sofie Kolm () and Søren Bo Nielsen ()
Additional contact information
Ann-Sofie Kolm: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Søren Bo Nielsen: Department of Economics, Copenhagen Business School, Postal: Copenhagen Business School, Department of Economics, Solbjerg Plads 3, 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: Unemployment; matching; wage bargaining; tax evasion

JEL-codes: H26; J41; J64

27 pages, June 15, 2005

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