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What we pay in the shadow: Labor tax evasion, minimum wage hike and employment

Nicolas Gavoille and Anna Zasova

No 21-017, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: The interactions between minimum wage policy and tax evasion remain largely unknown. We study firm-level employment effects of a large and biting minimum wage increase in Latvia conditional on labor tax compliance. The Latvian labor market is characterized by the prevalence of envelope wages, i.e. unreported cash-in-hand complements to the official wage. We apply machine learning to classify firms between compliant and tax-evading using a unique combination of administrative and survey data. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results suggest that these firms use wage underreporting as an adjustment margin, converting (part of) the envelope into legal wage. Increasing minimum wage contributes to tax rule enforcement, but this comes at the cost of negative employment consequences for compliant firms.

Keywords: Minimum wage; Employment; Tax evasion (search for similar items in EconPapers)
JEL-codes: E26 H26 J08 (search for similar items in EconPapers)
Date: 2021-09-21
New Economics Papers: this item is included in nep-big, nep-iue, nep-law, nep-mac, nep-pbe and nep-tra
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Handle: RePEc:sol:wpaper:2013/331990