Detecting Wage Under-Reporting Using a Double Hurdle Model

36 Pages Posted: 31 Dec 2011

See all articles by Peter Elek

Peter Elek

affiliation not provided to SSRN

Janos Kollo

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS); IZA Institute of Labor Economics

Balázs Reizer

affiliation not provided to SSRN

Péter A. Szabó

affiliation not provided to SSRN

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.

Keywords: tax evasion, double hurdle model, Hungary

JEL Classification: C34, H26, J38

Suggested Citation

Elek, Peter and Köllõ, János and Reizer, Balázs and Szabó, Péter A., Detecting Wage Under-Reporting Using a Double Hurdle Model. IZA Discussion Paper No. 6224. Available at SSRN: https://ssrn.com/abstract=1977810

Peter Elek (Contact Author)

affiliation not provided to SSRN

János Köllõ

Hungarian Academy of Sciences (HAS) - Research Centre for Economic and Regional Studies (HAS) ( email )

Labour Research Department
Budapest H-1112
Hungary
(36-1)309-2654 (Phone)
(36-1)319-3151 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Balázs Reizer

affiliation not provided to SSRN

No Address Available

Péter A. Szabó

affiliation not provided to SSRN

No Address Available

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