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Shadow economy, “mixed” firms, and labour market outcomes

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  • Gaetano Lisi

    (e-Campus University)

Abstract

To shed light on the complex and ambiguous relation between shadow economy and labour market outcomes, this theoretical paper introduces tax evasion and undeclared work into the benchmark macroeconomic model of the labour market (the search and matching model). Unlike the related literature, this work assumes that registered firms manage job vacancies in both the formal and the shadow sector (named as “mixed firms”), to maximise the total gains. The unemployed search for a job simultaneously in both sectors and accept the first job offer they receive, while tax audits allow to punish firms that evade taxes and use undeclared work. In this framework, tax audit emerges as the key tool for reducing shadow economy without harming labour market outcomes too much. Tax audit, indeed, has little impact on unemployment and increases the wage (cost) of undeclared work.

Suggested Citation

  • Gaetano Lisi, 2024. "Shadow economy, “mixed” firms, and labour market outcomes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(3), pages 685-701, June.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:3:d:10.1007_s10797-023-09797-7
    DOI: 10.1007/s10797-023-09797-7
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    More about this item

    Keywords

    Shadow economy; Mixed firms; Tax evasion; Undeclared work; Tax audit; Job vacancy cost; Unemployment;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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