Underground Labor, Search Frictions and Macroeconomic Fluctuations

33 Pages Posted: 19 Dec 2012

See all articles by Giuseppe Ciccarone

Giuseppe Ciccarone

University of Rome I - Department of Public Economics

Francesco Giuli

University of Rome III - Department of Economics

Enrico Marchetti

University of Naples Parthenope - Italy

Date Written: December 18, 2012

Abstract

We study the e¤ects of underground activities on labour market dynamics in a RBC model with search frictions in the labor market, bargained wage and quadratic hiring costs. Underground activities, which allow agents to (partially) evade taxes, are modelled through a moonlighting production scheme where both regular and underground labor use the same capital equipment inside the firm. Calibrating the model on the U.S. economy, we show that a higher relative size of underground production implies lower average employment and a lower job finding rate, together with higher volatility of employment and lower volatilities of hours worked and wages of regular labor services. The theoretical explanation we provide is that a higher level of the underground activity increases the ratio of the flow contribution of non-working to the flow contribution of a worker to a labour match.

Keywords: underground activities, tax evasion, search and matching, real business cycle

JEL Classification: E320, E260, J640

Suggested Citation

Ciccarone, Giuseppe and Giuli, Francesco and Marchetti, Enrico, Underground Labor, Search Frictions and Macroeconomic Fluctuations (December 18, 2012). Available at SSRN: https://ssrn.com/abstract=2190807 or http://dx.doi.org/10.2139/ssrn.2190807

Giuseppe Ciccarone

University of Rome I - Department of Public Economics ( email )

Via del Castro Laurenziano 9
Rome, 00161
Italy

HOME PAGE: http://dep.eco.uniroma1.it/~ciccaron/

Francesco Giuli (Contact Author)

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

Enrico Marchetti

University of Naples Parthenope - Italy ( email )

VIA MEDINA, 40 - SC. B - IIII PIANO
Via Generale Parisi, 13
NAPLES, 80133
Italy

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