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Optimal Policies with an Informal Sector
Journal article

Optimal Policies with an Informal Sector

Abstract

This paper characterizes optimal policies in the presence of tax evasion and undocumented workers. In equilibrium, domestic workers may work exclusively in the formal sector or also in the informal sector. Surprisingly, in equilibrium, wages are always equalized between domestic and undocumented workers, even if they do not work in the same sectors of the economy. This is driven by the interaction of firm level decisions with optimal government policy. We also find that enforcement may not always be decreasing in its cost, and that governments will optimally enforce labour market segmentation if enforcement costs are not too high.

Authors

Cuff K; Marceau N; Mongrain S; Roberts J

Journal

Journal of Public Economics, Vol. 95, No. 11-12, pp. 1280–1291

Publisher

Elsevier

Publication Date

December 1, 2011

DOI

10.1016/j.jpubeco.2010.10.010

ISSN

0047-2727

Labels

Sustainable Development Goals (SDG)

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