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Chapter 4 Detecting Wage Under-Reporting Using a Double-Hurdle Model

In: Informal Employment in Emerging and Transition Economies

Author

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  • Péter Elek
  • János Köllő
  • Balázs Reizer
  • Péter A. Szabó

Abstract

We estimate a double-hurdle (DH) model of the Hungarian wage distribution assuming censoring at the minimum wage and wage under-reporting (i.e. compensation consisting of the minimum wage, subject to taxation and an unreported cash supplement). We estimate the probability of under-reporting for minimum wage earners, simulate their genuine earnings and classify them and their employers as ‘cheaters’ and ‘non-cheaters’. In the possession of the classification, we check how cheaters and non-cheaters reacted to the introduction of a minimum social security contribution base, equal to 200 per cent of the minimum wage, in 2007. The findings suggest that cheaters were more likely to raise the wages of their minimum wage earners to 200 per cent of the minimum wage, thereby reducing the risk of tax audit. Cheating firms also experienced faster average wage growth and slower output growth. The results suggest that the DH model is able to identify the loci of wage under-reporting with some precision.

Suggested Citation

  • Péter Elek & János Köllő & Balázs Reizer & Péter A. Szabó, 2012. "Chapter 4 Detecting Wage Under-Reporting Using a Double-Hurdle Model," Research in Labor Economics, in: Informal Employment in Emerging and Transition Economies, pages 135-166, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:rleczz:s0147-9121(2012)0000034007
    DOI: 10.1108/S0147-9121(2012)0000034007
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    Citations

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    Cited by:

    1. Gavoille, Nicolas & Zasova, Anna, 2023. "Minimum wage spike and income underreporting: A back-of-the-envelope-wage analysis," Journal of Comparative Economics, Elsevier, vol. 51(1), pages 372-402.
    2. Mr. Ben Kelmanson & Koralai Kirabaeva & Leandro Medina & Borislava Mircheva & Jason Weiss, 2019. "Explaining the Shadow Economy in Europe: Size, Causes and Policy Options," IMF Working Papers 2019/278, International Monetary Fund.
    3. Bíró, Anikó & Prinz, Dániel & Sándor, László, 2022. "The minimum wage, informal pay, and tax enforcement," Journal of Public Economics, Elsevier, vol. 215(C).

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