UNDECLARED WORK AND WAGE INEQUALITY

Leandro Elia and Edoardo Di Porto

No 201108, Working Papers from Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF

Abstract: In this paper we study how undeclared work affects the wages of undeclared and declared workers and in particular the declared wage inequality. Using individual data on Italy in the years 2000-2004, we compute a cross and own labor demand elasticity for undeclared and declared work. We provide an identification strategy relying on Italian amnesty tax laws in 2002. Such laws have changed the shape of Italian undeclared sector causing a quick emersion of undeclared workers. Our results based on a set of 2SLS regressions suggest that undeclared work: 1) decreases declared wages, 2) adversely affects undeclared wages and 3) raises wage inequality in the declared sector. Undeclared work competes more with least skilled jobs, while do not affect high skilled jobs. We found complementarity between undeclared workers and medium skills jobs. As a consequence reducing undeclared work decreases wage inequality as well as it decreases the earnings in medium skill sectors. This result suggests that undertaking reducing undeclared labor-policy might encounter resistance because of welfare loss of the medium class of workers.

Keywords: Elasticity of labor demand; Undeclared labor; Wage inequality (search for similar items in EconPapers)
JEL-codes: H26 J23 J31 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2011-08
New Economics Papers: this item is included in nep-hrm, nep-iue, nep-lab and nep-lma
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