Consumer Services, Employment and the Informal Economy

Niels Kleis Frederiksen, Peter Hansen, Henrik Jacobsen and Peter Birch Soerensen

No 94-13, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: In recent years it has been suggested that employment could be promoted through subsidies or tax concessions to those parts of the consumer service sector which compete most directly with services produced in the home and in the black market. This paper sets up a computable general equilibrium model of the interaction between the formal and the informal economy in Denmark. The model indicates that subsidies to the consumer service sector could generate substantial employment and welfare gains if the real wage is rigid. By contrast, if the real wage is fully flexible, the potential gains from subsidization are found to be modest.

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