This paper develops a four sector equilibrium search and matching
model with informal sector employment opportunities and educational
choice. We show that underground activities reduce educational at-
tainments if informal employment opportunities mainly are available
to low educated workers. More zealous enforcement policy will in this
case improve educational incentives as it reduces the attractiveness of
remaining a low educated worker. Characterizing the optimal enforce-
ment policies, we nd that relatively more audits should be targeted
towards the sector employing low educated workers, elsewise a too low
stock of educated workers is materialized.
We examine the impact of discrimination on labour market performance when workers are subject to a risk of losing skills during the experience of unemployment. Within a search and matching model, we show that all natives and immigrants are affected by discrimination. Discrimination in one sector has positive spillovers, inducing employment increases in the other sector. Discrimination may induce immigrants to train more or less than natives, depending on the sector where it is present. Welfare tends to be most negatively affected by discrimination among highproductivity workers.