Optimal Policies with an Informal Sector

Katherine Cuff, Nicolas Marceau, Steeve Mongrain and Joanne Roberts ()

Journal of Public Economics, 2011, vol. 95, issue 11, 1280-1291

Abstract: This paper characterizes optimal policies in the presence of tax evasion and undocumented workers. In equilibrium, domestic workers may work exclusively in the formal sector or also in the informal sector. Surprisingly, in equilibrium, wages are always equalized between domestic and undocumented workers, even if they do not work in the same sectors of the economy. This is driven by the interaction of firm level decisions with optimal government policy. We also find that enforcement may not always be decreasing in its cost, and that governments will optimally enforce labour market segmentation if enforcement costs are not too high.

Keywords: H32; H26; K42; Informal Labour Market; Enforcement; Undocumented Workers; Public Good Provision (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:95:y:2011:i:11:p:1280-1291

DOI: 10.1016/j.jpubeco.2010.10.010

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