In the Shadow of the Labour Market

Tone Ogndal ()
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Tone Ogndal: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Authors registered in the RePEc Author Service: Tone Ognedal

No 05/2012, Memorandum from Oslo University, Department of Economics

Abstract: Why do not people evade more taxes when their gain from evasion is higher than the expected penalties? Why does only a small minority evade when a large majority is willing to? These tax evasion puzzles are explained in a labour market framework where employees may combine reported work in firms with self-employed shadow work. On the margin, time spent on self-employed work reduces labour productivity in reported work. This creates an equilibrium where small, low-productive firms offer jobs with low wage rates but time for self-employed shadow work, while larger, more efficient firms offer jobs with higher reported wage rates but no time for shadow work. Improving the tax morale may not reduce evasion but only sort the honest people into jobs with no time for shadow work. Shadow work leads to an inefficient allocation of employees since it has the effect of a subsidy to low productive firms. Both lower taxes and minimum wages reduce evasion and improve labour allocation but harms low productive firms.

Keywords: Shadow work; Tax evasion; Labour market (search for similar items in EconPapers)
JEL-codes: H26 J29 K34 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2012-02-14
New Economics Papers: this item is included in nep-iue and nep-lab
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