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Does Tax Evasion Affect Unemployment and Educational Choice ?

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While examining the macroeconomic effects of government taxand punishment policies, this paper develops a three-sector generalequilibrium model featuring matching frictions and worker-firm wagebargaining. Workers are assumed to differ in ability, and the choiceof education is determined endogenously. Job opportunities in an informalsector are available only to workers who choose not to acquirehigher education. We find that increased punishment of informal activitiesincreases the number of educated workers and reduces the number of unemployed workers. Considering welfare, we show it isoptimal to choose punishment rates so to more than fully counteractthe distortion created by the government’s inability to tax theinformal sector.JEL-codes: H26, I21, J64Keywords: Tax evasion, underground economy, education, matching,unemployment.

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Ann-Sofie Kolm, Birthe Larsen

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