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Minimum Wage and Tax Evasion: Theory and Evidence

Mirco Tonin

No 701, IEHAS Discussion Papers from Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences

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 officially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction finds 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: Minimum Wage; Tax Evasion; Wage Distribution; Hungary (search for similar items in EconPapers)
JEL-codes: J38 H26 H32 P2 (search for similar items in EconPapers)
Date: 2007
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Related works:
Journal Article: Minimum wage and tax evasion: Theory and evidence (2011) Downloads
Working Paper: Minimum Wage and Tax Evasion: Theory and Evidence (2011) Downloads
Working Paper: Minimumwage and tax evasion: theory and evidence (2009) Downloads
Working Paper: Minimum Wage and Tax Evasion: Theory and Evidence (2007) Downloads
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