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Minimum Wage and Tax Evasion: Theory & Evidence

Minimum Wage and Tax Evasion: Theory & Evidence
Minimum Wage and Tax Evasion: Theory & Evidence
The paper investigates the role of the minimum wage in a competitive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low-productivity workers and transforms a nominally neutral fiscal system into a regressive one. A spike in the wage distribution at the minimum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose officially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction finds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.
William Davidson Institute, University of Michigan
Tonin, Mirco
bd4b5fbe-5992-44cb-a702-9c768fdf9bc0
Tonin, Mirco
bd4b5fbe-5992-44cb-a702-9c768fdf9bc0

Tonin, Mirco (2007) Minimum Wage and Tax Evasion: Theory & Evidence (William Davidson Institute Working Paper) Michigan, USA. William Davidson Institute, University of Michigan 59pp.

Record type: Monograph (Working Paper)

Abstract

The paper investigates the role of the minimum wage in a competitive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low-productivity workers and transforms a nominally neutral fiscal system into a regressive one. A spike in the wage distribution at the minimum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose officially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction finds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.

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Published date: 1 March 2007

Identifiers

Local EPrints ID: 48641
URI: http://eprints.soton.ac.uk/id/eprint/48641
PURE UUID: 93c82966-52cb-40a8-a353-ca048f1747f4

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Date deposited: 05 Oct 2007
Last modified: 22 Jul 2022 20:56

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Contributors

Author: Mirco Tonin

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