Wages, unemployment, and the underground economy

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Wages, unemployment, and the underground economy

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Title: Wages, unemployment, and the underground economy
Author: Kolm, Ann-Sofie; Larsen, Birthe
Abstract: While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker- firm wage bargaining. Workers search for jobs in both the formal and the informal sector. We analyse the impact of higher punishment rates and a higher audit rate on labour market performance. We find that a higher punishment rate reduces the size of the informal sector and reduces unemployment. A higher audit rate has an ambiguous impact on unemployment, and may actually increase the size of the underground economy. JEL-codes: H26 Keywords: Tax evasion, underground economy, matching, bargaining, unemployment.
URI: http://hdl.handle.net/10398/7487
Date: 2004-01-21

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