Underground Labor, Search Frictions and Macroeconomic Fluctuations
33 Pages Posted: 19 Dec 2012
Date Written: December 18, 2012
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
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