[Research Seminar] Finance: “What we pay in the shadow: Labor tax evasion, minimum wage hike and employment” N. GAVOILLE – SSE Riga

Speakers: Nicolas GAVOILLE
SSE Riga

Date and Location – Thursday November 25th 2021 from 14:00 to 15:30 on Zoom

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ABSTRACT

This paper analyzes a large and biting minimum wage hike in a context of prevalent labor tax evasion. We examine a diffuse type of labor tax evasion: envelope wage, i.e., an unreported cash-in-hand complement to the official wage. Exploiting a combination of administrative and survey data, we propose a methodology to disentangle compliant firms from tax evading ones and assess the validity of the approach with several checks.

We then study firm-level employment response to the minimum wage hike conditional on tax compliance. Contrary to compliant firms, firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results suggest that firms use wage underreporting as a margin to absorb the minimum wage shock. Increasing minimum wage contributes to tax rules enforcement by pushing tax-evading firms to convert part of the envelope into legal wage. This however comes at the cost of negative employment consequences for compliant firms.

Keywords: Minimum wage, employment, tax evasion