Wages, unemployment, and the underground economy

Ann-Sofie Kolm and Birthe Larsen

No 11-2003, Working Papers from Copenhagen Business School, Department of Economics

Abstract: While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Workers search for jobs in both the formal and the informal sector. We analyse the impact of higher punishment rates and a higher audit rate on labour market performance. We find that a higher punishment rate reduces the size of the informal sector and reduces unemployment. A higher audit rate has an ambiguous impact on unemployment, and may actually increase the size of the underground economy.

Keywords: Tax evasion; underground economy; matching; bargaining; unemployment (search for similar items in EconPapers)
JEL-codes: H26 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2003-10-20
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Wages, Unemployment, and the Underground Economy (2003)
Working Paper: Wages, Unemployment, and the Underground Economy (2001)
Working Paper: Wages, Unemployment, and the Underground Economy (2001)
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