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Informal Unemployment and Education

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This paper develops a four sector equilibrium search and matchingmodel with informal sector employment opportunities and educationalchoice. We show that underground activities reduce educational at-tainments if informal employment opportunities mainly are availableto low educated workers. More zealous enforcement policy will in thiscase improve educational incentives as it reduces the attractiveness ofremaining a low educated worker. Characterizing the optimal enforce-ment policies, we nd that relatively more audits should be targetedtowards the sector employing low educated workers, elsewise a too lowstock of educated workers is materialized.

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Ann-Sofie Kolm, Birthe Larsen

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