Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2003:22: Does Tax Evation Affect Unemployment and Educational Choice?

Ann-Sofie Kolm () and Birthe Larsen ()
Additional contact information
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.

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

JEL-codes: H26; I21; J64

36 pages, September 1, 2003

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