Wages, Unemployment, and the Underground Economy∗

  title={Wages, Unemployment, and the Underground Economy∗},
  author={Alexandra Kolm and Birthe Larsen},
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 workerfirm 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… CONTINUE READING

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