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In the Shadow of the Labour Market

Author

Listed:
  • Ogndal, Tone

    (Dept. of Economics, University of Oslo)

Abstract
Why do not people evade more taxes when their gain from evasion is higher than the expected penalties? Why does only a small minority evade when a large majority is willing to? These tax evasion puzzles are explained in a labour market framework where employees may combine reported work in firms with self-employed shadow work. On the margin, time spent on self-employed work reduces labour productivity in reported work. This creates an equilibrium where small, low-productive firms offer jobs with low wage rates but time for self-employed shadow work, while larger, more efficient firms offer jobs with higher reported wage rates but no time for shadow work. Improving the tax morale may not reduce evasion but only sort the honest people into jobs with no time for shadow work. Shadow work leads to an inefficient allocation of employees since it has the effect of a subsidy to low productive firms. Both lower taxes and minimum wages reduce evasion and improve labour allocation but harms low productive firms.

Suggested Citation

  • Ogndal, Tone, 2012. "In the Shadow of the Labour Market," Memorandum 05/2012, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2012_005
    as

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    File URL: https://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2012/Memo-05-2012.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Shadow work; Tax evasion; Labour market;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J29 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Other
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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