Detecting Wage Under-reporting Using a Double Hurdle Model

Péter Elek, János Köllő (), Balazs Reizer and Péter A. Szabó
Additional contact information
János Köllő: Institute of Economics, Budapest
Péter A. Szabó: Reformed Presbyterian Church of Central and Eastern Europe

No 6224, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We estimate a double hurdle (DH) model of the Hungarian wage distribution assuming censoring at the minimum wage and wage under-reporting (i.e. compensation consisting of the minimum wage, subject to taxation, and an unreported cash supplement). We estimate the probability of under-reporting for minimum wage earners, simulate their genuine earnings and classify them and their employers as 'cheaters' and 'non-cheaters'. In the possession of the classification we check how cheaters and non-cheaters reacted to the introduction of a minimum social security contribution base, equal to 200 per cent of the minimum wage, in 2007. The findings suggest that cheaters were more likely to raise the wages of their minimum wage earners to 200 per cent of the minimum wage thereby reducing the risk of tax audit. Cheating firms also experienced faster average wage growth and slower output growth. The results suggest that the DH model is able to identify the loci of wage under-reporting with some precision.

Keywords: double hurdle model; tax evasion; Hungary (search for similar items in EconPapers)
JEL-codes: C34 H26 J38 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-12
New Economics Papers: this item is included in nep-iue, nep-lab and nep-lma
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Citations: View citations in EconPapers (4)

Published - published in: Informal Employment in Emerging a Transition Economies, Research in Labor Economics, 34,. Emerald Group Publishing Limited, 2012, 135-166

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Related works:
Working Paper: Detecting Wage Under-Reporting Using a Double Hurdle Model (2012)
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