Working Paper: CEPR ID: DP3433
Authors: Tito Boeri; Pietro Garibaldi
Abstract: This Paper studies the border between shadow employment and unemployment. It argues that the two macroeconomic phenomena are two faces of the same coin: any policy aimed at reducing the former will increase the latter. Theoretically, it proposes and solves a matching model of the labour market, where shadow employment emerges in equilibrium as the endogenous response of firms and workers who felt overburdened by taxes and regulations. While the model we propose neatly rationalizes the labour market trade-off implied by ?shadow reducing policies?, it suggests that economies with low unemployment turnover should be characterized also by low turnover along the shadow margins. Since existing estimates of shadow employment are silent on labour market flows and on the relation between shadow activity and the main labour market aggregates, we perform original empirical work on the border between employment, unemployment and inactivity, and we find that Italian shadow employment has longer duration in regions with lower unemployment turnover. We also find support to the substantive assumptions of the model.
Keywords: matching; shadow activity; unemployment
JEL Codes: J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nonemployment (J68) | informal sector (J46) |
| shadow employment (J46) | unemployment (J64) |
| taxation and regulation (H29) | shadow employment (J46) |
| unemployment turnover (J63) | shadow employment duration (J64) |