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Abstract:
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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. |
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