Minimum Wage and Tax Evasion: Theory and Evidence

59 Pages Posted: 23 May 2007

See all articles by Mirco Tonin

Mirco Tonin

Free University of Bozen-Bolzano; IZA; CESifo (Center for Economic Studies and Ifo Institute)

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

Tonin, Mirco, Minimum Wage and Tax Evasion: Theory and Evidence (January 30, 2007). William Davidson Institute Working Paper No. 865, Available at SSRN: https://ssrn.com/abstract=988188 or http://dx.doi.org/10.2139/ssrn.988188

Mirco Tonin (Contact Author)

Free University of Bozen-Bolzano ( email )

Sernesiplatz 1
Bozen-Bolzano, BZ 39100
Italy

IZA ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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