Search frictions and labor market dynamics in a real business cycle model with undeclared work

Abstract

We study the effects of undeclared work (UDW) on labor market dynamics in a real business cycle (RBC) model with search and matching frictions in the labor market. Distinction is made between the wages paid and the hours worked in regular and in undeclared types of activity.Calibrating the model on the US economy, we show that a greater size of UDW implies lower average employment, higher volatility of employment and lower volatility of regularwages. These volatilities are affected by the steady-state ratio between the minimum value of the regular wage that can be accepted by a worker and the maximum value that can be paid by a firm in the Nash bargaining process, which occurs when a labor match is realized. The greater the ratio, the higher the volatility of employment and the lower the volatility of wages. We demonstrate that, due to a social stigma attached to UDW, an increase in undeclared hours raises this ratio by reducing the numerator less than the denominator. This suggests that the introduction of UDWmay improve the ability of RBC models to match the empirical volatilities of labor market variables

Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy

“…poor provision of public goods, income inequality, low tax revenue) of informality, particularly in poor and developing countries. A nonexhaustive list of papers that focus on informality and topics of interest is: contract enforcement (Quintin, 2008), productivity (D'Erasmo andBoedo, 2012), economic development (La Porta and Shleifer, 2014), unemployment benefits (Bosch and Esteban-Pretel, 2015), search frictions in the labor market (Ciccarone et al, 2016), growth (Maiti and Bhattacharyya, 2020), and tax collection Di Caro and Sacchi (2020). See also Schneider and Enste (2000) for a review of the economic literature on informal activities.…”