() and Birthe Larsen
Ann-Sofie Kolm: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Birthe Larsen: Copenhagen Business School, Postal: Department of Eonomics, Solbjerg Plads 3, DK-2000 Copenhagen F, Denmark
Abstract: While examining the macroeconomic effects of government tax and punishment policies, this paper develops a three-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Workers are assumed to differ in ability, and the choice of education is determined endogenously. Job opportunities in an informal sector are available only to workers who choose not to acquire higher education. We find that increased punishment of informal activities increases the number of educated workers and reduces the number of unemployed workers. The analysis also shows that knowledge spillovers give a welfare maximizing government an extra incentive to punish informal activities.
36 pages, September 1, 2003
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