Underreporting and Minimum Wage

LICOS Centre for Institutions and Economic Performance Discussion Paper No. 324/2012

40 Pages Posted: 16 Jun 2013

See all articles by Aljoša Feldin

Aljoša Feldin

University of Ljubljana - Faculty of Economics

Saao Polanec

University of Ljubljana - Faculty of Economics

Date Written: 2012

Abstract

We propose a theory of firm that is consistent with empirically observed phenomenon of firms simultaneously engaging in both formal and informal activities. Firms face endogenous probability of auditing that depends on the scale of underreporting of both sales and wages. We characterize the conditions for a firm facing corporate, value added and payroll taxes to hide a part of its activities. Underreporting gives rise to employment levels above those expected for firms that report truthfully. We also show that an underreporting firm is less affected by the introduction of the minimum wage. It further decreases the level of reported sales to mitigate the adverse effect that the minimum wage causes and decreases optimal employment by relatively less than an honest firm. The latter hypotheses is tested empirically using a matched employer-employee data set for Slovenia during the period of several minimum wage hikes (2007-2010).

Keywords: informal economy, minimum wage, taxation, auditing

JEL Classification: H26, J38, D21

Suggested Citation

Feldin, Aljoša and Polanec, Saso, Underreporting and Minimum Wage (2012). LICOS Centre for Institutions and Economic Performance Discussion Paper No. 324/2012, Available at SSRN: https://ssrn.com/abstract=2279392 or http://dx.doi.org/10.2139/ssrn.2279392

Aljoša Feldin (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploščad 17
Ljubljana, 1000
Slovenia

Saso Polanec

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
64
Abstract Views
546
Rank
622,763
PlumX Metrics