What we pay in the shadows: Labor tax evasion, minimum wage hike and employment

Nicolas Gavoille and Anna Zasova ()
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Anna Zasova: Baltic International Centre for Economic Policy Studies (BICEPS)

No 6, SSE Riga/BICEPS Research Papers from Baltic International Centre for Economic Policy Studies (BICEPS), Stockholm School of Economics in Riga (SSE Riga)

Abstract: The interactions between minimum wage policy and tax evasion remain largely unknown. We study firm-level employment effects of a large and biting minimum wage increase in the context of widespread wage underreporting. We apply machine learning to classify firms between tax-compliant and tax-evading using a unique combination of Latvian administrative and survey data. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results indicate that these firms use wage underreporting as an adjustment margin, converting (part of) undeclared cash payments into legal wage. Increasing minimum wage contributes to tax rule enforcement, but comes at the cost of negative employment consequences for compliant firms.

Pages: 75 pages
Date: 2021-08
New Economics Papers: this item is included in nep-big and nep-lma
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Citations: View citations in EconPapers (12)

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Working Paper: What we pay in the shadow: Labor tax evasion, minimum wage hike and employment (2021)
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