An Empirical Model of Labor Supply in the Underground Economy

Abstract

This paper uses micro data from a random survey carried out in the region of Quebec City, Canada, to estimate a model of labor supply in the underground economy. The model assumes that the individual's gross wage rate in the regular sector is parametric while his gross labor earnings in the underground sector are a concave function of hours of work. This distinction between the two sectors is used to generate a simple separation result between preferences and the magnitude of underground labor market activities. This result implies that the individual's labor supply in the underground economy is generally a negative function of his net wage rate in the regular sector. The separation result also implies a set of restrictions on the parameters of the reduced form of the model, which are imposed using minimum distance methods of estimation. Various generalized method of moments specification tests allow us to verify the validity of these restrictions. According to our results, the marginal tax rates embodied in the Quebec tax-transfer system are an important determinant of the decision to participate in the underground sector.

Informalidade no mercado de trabalho brasileiro: uma resenha da literatura

“…Já Lemieux et al (1994) analisam empiricamente os efeitos dos impostos sobre a oferta de trabalho no setor informal na cidade de Quebec [de forma análo-ga ao trabalho de Jung et al (1994), os autores definem o setor informal como aquele em que a evasão fiscal é possível]. A partir de suas estimativas, os autores observam uma elevada e negativa elasticidade das horas trabalhadas no setor informal com respeito ao salário no setor formal.…”

Tax evasion and work in the underground sector

“…The utility function, U(d), is assumed to be strictly concave, increasing in C and decreasing in h R and h U which may not necessarily be perfect substitutes, see for instance in Fortin et al (1990) and Lacroix and Fortin (1992).…”

Choix occupationnels et offre de travail lorsque les salaires sont fonction des heures travaillées

“…Les activités du marché du travail ont alors été classées selon deux catégo-ries, activités du secteur formel et activités du secteur informel, ceci en regardant si le salaire provenant du travail était reporté ou non dans le rapport d'impôt du travailleur. Des détails plus spécifiques sur l'enquête peuvent être trouvés dans Fortin et Fréchette (1987) ou Lemieux, Fortin et Fréchette (1994). Les variables mesurant les activités de travail dans l'économie informelle risquent fort d'être contaminées par un biais substantiel de sous-évaluation.…”