Minimum Wage and Tax Evasion: Theory and Evidence

Mirco Tonin

No wp865, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: The paper investigates the role of the minimum wage in a competi- tive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low- productivity workers and transforms a nominally neutral ?scal system into a regressive one. A spike in the wage distribution at the mini- mum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose o¢ cially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction ?nds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.

Keywords: MinimumWage; Tax Evasion; Wage Distribution; Hungary (search for similar items in EconPapers)
JEL-codes: H26 H32 J38 P2 (search for similar items in EconPapers)
Pages: pages
Date: 2007-01-01
New Economics Papers: this item is included in nep-lab and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Minimum wage and tax evasion: Theory and evidence (2011)
Working Paper: Minimum Wage and Tax Evasion: Theory and Evidence (2011)
Working Paper: Minimumwage and tax evasion: theory and evidence (2009)
Working Paper: Minimum Wage and Tax Evasion: Theory and Evidence (2007)
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