Essays on Labour Market Structure and Policies

University dissertation from Stockholm : Institutet för internationell ekonomi

Abstract: The thesis consists of three essays on labour market structure and policies.Minimum Wage and Tax Evasion: Theory builds a theoretical model to analyse the interaction between minimum wage legislation and tax evasion by employed labour. The firm and the worker agree on the amount of earnings to report to the fiscal authorities, which possess an imperfect detection technology. The introduction of the minimum wage poses a constraint on the reporting decision and induces an increase in compliance by some agents. As a consequence, a spike at the minimum wage appears in the distribution of declared earnings. Moreover, a nominally neutral fiscal regime becomes regressive, while fiscal revenues may increase.Minimum Wage and Tax Evasion: Empirical Evidence tests the prediction derived from the model in the first essay that a minimum wage hike implies a fall in true income even for those workers who appear to benefit from it. It uses the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment. A difference-in-difference approach is used, comparing food consumption before and after the minimum wage hike for households affected by it and for similar but unaffected households. The treatment effect is negative and significant across different specifications, thus supporting the prediction of the model. The control group is validated by showing that it did not differ from the treatment group in the pre-policy period.In-Work Benefits in Search Equilibrium investigates the general equilibrium effects of in-work benefits in a search framework. Introducing in-work benefits reduces equilibrium unemployment, moderate wages, and boosts participation and search. Total employment increases as a result. Compared to a partial equilibrium analysis, accounting for general equilibrium effects reinforces the impact of benefits on labour market variables. The case when benefits are financed through proportional taxation on wages is also analysed.

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