Underground labor, search frictions and macroeconomic fluctuations

Giuseppe Ciccarone and Francesco Giuli
Authors registered in the RePEc Author Service: Enrico Marchetti

No 159, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: We study the e¤ects of underground activities on labour market dynamics in a RBC model with search frictions in the labor market, bargained wage and quadratic hiring costs. Underground activities, which allow agents to (partially) evade taxes, are modelled through a moonlighting production scheme where both regular and underground labor use the same capital equipment inside the firm. Calibrating the model on the U.S. economy, we show that a higher relative size of underground production implies lower average employment and a lower job finding rate, together with higher volatility of employment and lower volatilities of hours worked and wages of regular labor services. The theoretical explanation we provide is that a higher level of the underground activity increases the ratio of the flow contribution of non-working to the flow contribution of a worker to a labour match.

Keywords: underground activities; tax evasion; search and matching; real business cycle (search for similar items in EconPapers)
JEL-codes: E26 E32 J64 (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-dge, nep-iue, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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