Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2010:3: The Black Economy and Education

Ann-Sofie Kolml () and Birthe Larsen ()
Additional contact information
Ann-Sofie Kolml: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Birthe Larsen: Insead, CEBR and Copenhagen Business School, Postal: Copenhagen Business School, ├śkonomisk Institut, Porcel├Žnshaven 16A, 2000 Frederiksberg

Abstract: This paper develops and equilibrium search and matching model with informal sector employment opportunities and educational choice. We show that informal sector job opportunities distort educational attainment inducing a too low stock of educated workers. As informal job opportunities to a larger extent face low skilled workers, combating the informal sector improves welfare as it increases the incentives for education. However, too aggressive combating of the informal sector is not optimal as that induces inefficiently high unemployment rates.

Keywords: Tax evasion; underground economy; education; matching; unemployment

JEL-codes: H26; I21; J64

27 pages, February 2, 2010

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