Does tax evasion affect unemployment and educational choice?

To examine the macro economic effects of government tax and punishment policies, this paper develops a three-sector general quilibrium model featuring matching frictions, heterogenous abilities and an informal sector with tax evasion. The choice of education is determined endogenously. Job opportunities in an informal sector are available only to workers who choose not to acquire higher education. We find that increased punishment of informal activities increases the number of educated workers and reduces the number of unemployed workers. Characterizing the optimal tax and punishment system, we show that it is optimal to more than fully counteract the distortion created by the government’s inability to tax the informal sector. The optimal choice of tax and punishment system, however, implies an inefficiently low stock of educated workers.Tax evasion; underground economy; education; matching; unemployment

Wages, Unemployment, and the Underground Economy

While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Different goods are produced in the formal sector and the informal sector, and workers search for jobs in both sectors. We analyse the impact of higher punishment rates and a higher audit rate on labor market performance, and we find that a higher punishment rate (i) reduces the size of the informal sector and increases the size of the formal sector, (ii) decreases real producer wages in both sectors, and (iii) reduces the unemployment rate. The effect of a higher audit rate is less clear. We find that a higher audit rate (i) reduces the size of the informal sector relative to the size of the formal sector, and (ii) has an ambiguous impact on unemployment and real wages.Tax evasion; underground economy; matching; bargaining; unemployment

Moral, the Informal Sector, and Unemployment

While examining the macroeconomic effects of increased government control of the informal sector, this paper develops a two-sector general equilibrium model featuring matching frictions, and heterogeneous workers in terms of moral. This facilitates an analysis of how wage setting and unemployment is affected by punishment policies, which is ignored in the previous literature.Tax evasion; wage bargains; matching; moral; unemployment

Tax Effects, Search Unemployment, and the Choice of Educational Type

This paper examines the effect of taxes on the individuals’ choices of educational direction, and thus on the economy’s skill composition. A proportional labour income tax induces too many workers with high innate ability to choose an educational type with high consumption value and low effort costs. This increases the skill mismatch and aggregate unemployment in the economy. The government can correct for this distortion by use of differentiated tuition fees or tax rates.unemployment, matching, education, optimal taxation, tuition fees

The Black Economy and Education

This paper develops and equilibrium search and matching model with informal sector employment opportunities and educational choice. We show that informal sector job opportunities distort educational attainment inducing a too low stock of educated workers. As informal job opportunities to a larger extent face low skilled workers, combating the informal sector improves welfare as it increases the incentives for education. However, too aggressive combating of the informal sector is not optimal as that induces inefficiently high unemployment rates.Tax evasion; underground economy; education; matching; unemployment

Skill level, Cognitive Ability, Unemployment and Welfare

This paper examines the implications of that workers may not be able to estimate their true costs of acquiring skills. Consequently, too few workers may acquire skills. This allows for the possibility that subsidizing education is welfare improving. Furthermore, if the presence of skill-biased technological shocks increase unemployment, this may explain why the market it-self cannot respond to this by making it sufficiently attractive to acquire skills. Consequently, the trade-off in-between subsidizing education and thereby reducing unemployment and optimizing welfare may be eliminated. We analyse this issue in a simple educational model and next in a search equilibrium model including a skill choice decision. Keywords: Education, subsidies, efficiency, unemployment. JEL codes: I20, J64

What Makes Hiring Difficult? Evidence from Linked Survey-Administrative Data

We designed an innovative survey of firms and linked it to Danish administrative data to yield new insights about the factors that can influence firms’ hiring decisions. Several important findings stand out: (1) search and training frictions and economic uncertainty are as important as labor costs in hiring decisions ; (2) search and training frictions are more likely to affect younger and smaller firms; (3) uncertainty is more likely to affect hiring decisions in low-productivity firms; (4) thirty percent of firms prefer to hire already employed persons over the unemployed, because they believe that unemployed workers have lower abilities due to negative selection or skill depreciation during unemployment; and (5) these firms are more likely to report that labor market frictions and labor costs considerations discourage them from hiring

Do attitudes towards immigrants matter?

We exploit the regional variation in negative attitudes towards immigrants to Sweden in order to analyse what are the consequences of such attitudes have on immigrants welfare. A well educated immigrant from a non developed country who lives in a municipality with strong negative attitudes earns less than what she would earn if she lived in a municipality where natives are more positive. If attitudes changed from the average level to the most positive level, her wage would increase by 12%. This would reduce the wage gap to well-educated immigrants from developed countries by 70%. We interpret this eect as evidence of labour market discrimination. The same reduction in negative attitudes would increase the welfare of immigrants from Africa and Asia, through their wage and local amenities, by an equivalent to one third of their wage. The analogous amount for immigrants from South America and Eastern Europe is one fourth of their wage if they are well educated and one tenth otherwise

Labour Market Performance Effects of Discrimination and Loss of Skill

We examine the impact of discrimination on labour market performance when workers are subject to a risk of losing skills during the experience of unemployment. Within a search and matching model, we show that all natives and immigrants are affected by discrimination. Discrimination in one sector has positive spillovers, inducing employment increases in the other sector. Discrimination may induce immigrants to train more or less than natives, depending on the sector where it is present. Welfare tends to be most negatively affected by discrimination among highproductivity workers