Minimum Wage and Tax Evasion: Theory and Evidence
59 Pages Posted: 23 May 2007
Date Written: January 30, 2007
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.
Keywords: MinimumWage, Tax Evasion,Wage Distribution, Hungary
JEL Classification: J38, H26, H32, P2
Suggested Citation: Suggested Citation
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