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Abstract:
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This paper develops a general equilibrium search and matching
model where an underground economy co-exists along with the formal
part of the economy. In analyzing how tax and punishment policies
a¤ect labour market performance, we find that punishment of infor-
mal sector activities induce workers and firms to reallocate towards
the formal sector. However, more importantly, we find that this real-
location tends to improve e¢ ciency in search, reduce the overall wage
pressure, and reduce actual unemployment. |
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