nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒02‒26
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Nature of the Relationship between Minimum Wage and the Shadow Economy Size: An Empirical Analysis for the Case of Romania By Davidescu, Adriana Anamaria; Schneider, Friedrich
  2. Tax Morale, Fiscal Capacity, and Wars By Alessandro Belmonte; Désirée Teobaldelli; Davide Ticchi
  3. Tax evasion, testosterone and personality traits By Arbex, Marcelo; Carré, Justin M.; Geniole, Shawn N.; Mattos, Enlinson
  4. Political Change and Informality: Evidence from the Arab Spring By Elsayed, Ahmed; Wahba, Jackline

  1. By: Davidescu, Adriana Anamaria (Bucharest University of Economic Studies); Schneider, Friedrich (University of Linz)
    Abstract: The recent increase in the minimum wage in Romania in early May 2016 represented a popular topic at the national level, which indicated that aggressive increases in the minimum wage could create a competitiveness problem in the context of a relatively high level of informal economic activities. The objective of this paper is to analyse the nature of the relationship between the minimum wage and the size of the Romanian shadow economy using quarterly data for the period 2000-2015. The MIMIC model has been used to estimate the dimension of the shadow economy, and the empirical results revealed that unemployment, self-employment, indirect taxation and a lack of trust in the government are considered the main causes of Romanian informality. The results also indicated that the Romanian shadow economy decreased until 2008 to a value of approximately 27.8% of the official GDP. During the economic crisis, a slow increase in the shadow economy occurred, whereas in recent quarters, a slow decrease was observed. The potential effect of an increase in the minimum wage on the size of the shadow economy has been analysed using the Granger causality approach with vector error correction models. The empirical results indicated that an increase in the minimum wage can be considered a long-term supporting factor for the shadow economy because it increases informal economic activities, as firms will seek alternative methods of circumventing authorities. However, the empirical results do not support any effects of an increase in the minimum wage in the short run.
    Keywords: minimum wage, shadow economy, MIMIC model, Granger causality, Romania
    JEL: J31 C32 C52 O17 P48
    Date: 2017–12
  2. By: Alessandro Belmonte (IMT School for advanced studies); Désirée Teobaldelli (University of Urbino); Davide Ticchi (Marche Polytechnic University)
    Abstract: This paper studies how mobilization for war motivates citizens to contribute to their own community and therefore help forming tax morale in a constituency. We derive a theoretical model to investigate government's decision to expand tax revenues from alternative sources, namely changing the country's culture of tax compliance or expanding fiscal capacity. Despite the two are initially substitute, we show how in equilibrium dynamic complementarity arises. Our mechanism exploits exogenous variation in the cost of tax morale formation, induced by an expected war (either internal or external) that makes easier for the government to mobilize the constituency. We motivate our theory through a novel cross-country analysis that uses information on war frequency, tax morale, and fiscal capacity. We additionally discuss some historical cases consistent with our mechanism.
    Keywords: tax morale, state capacity, external threat, civil wars, dynamic complementarity, culture and institutions
    JEL: P16 H11 H26 H41
    Date: 2018–02
  3. By: Arbex, Marcelo; Carré, Justin M.; Geniole, Shawn N.; Mattos, Enlinson
    Abstract: High testosterone levels in men may inhibit tax evasion. From a laboratory experiment with 121 young men, we present suggestive evidence that putative markers of prenatal and pubertal testosterone exposure and some personality traits predict the decision of evading taxes. We also observe a sizable and negative, although weakly signi cant (at 10%), treatment e ect, controlling for individual characteristics, testosterone exposure markers, medication and drugs use. Reinforced by permutation tests for the treatment variable, a lower prevalence of tax evasion in the treated group is in line with recent results that suggest testosterone may increase prosocial or less sel sh behavior.
    Date: 2018–02
  4. By: Elsayed, Ahmed (IZA); Wahba, Jackline (University of Southampton)
    Abstract: This paper examines informality during the political and economic turmoil that accompanied the Arab Spring revolution in Egypt. The paper focuses on unprotected employment and the extent to which it changed by educational level right after the January Uprising of 2011. We find that over time and particularly after the revolution, informal employment has increased for both high- and low-educated workers however, through different paths: high educated were more likely to be stuck in informality, whilst low-educated formal workers were more likely to lose their contracts. The results suggest a high level of rigidity in the Egyptian labor market even in the wake of the Arab Spring.
    Keywords: informal employment, job contracts, Arab Spring
    JEL: J21 J23 J24 J31 O17
    Date: 2017–12

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