Arne Jon Isachsen

The Hidden Economy: The Labor Market and Tax Evasion

When the option of tax evasion is included in the individual’s labor supply decisions, it is shown how the labor market is divided into an irregular and an official market. The impact of changes in tax rates, wage rates and the probability of being caught on the supply of labor in these two markets of the economy is calculated.

The Behavior of Tax Evaders

Tax evasion in this paper manifests itself in two forms, underreporting of ordinary income and working in the hidden economy. Based on a specification of a utility function as well as on a tax function it is found, somewhat surprisingly, that an increase in the marginal tax rate in Norway reduces hours of work in the hidden economy. Underreporting of ordinary income increases as expected. The effect on total tax evasion is indeterminate. However, employing survey data and maximizing a likelihood function, an increase in the marginal tax rate turns out to have the expected positive effect both upon the supply of black labor and on under-reporting of ordinary income. This latter approach also revealed that tax evasion is a more common phenomenon among men than women, and that for both sexes hours of work in the hidden economy peak in the mid-thirties.

Understanding the market economy

Introduction. Part I: The Economic Problem. 1: Production and distribution. 2: Supply and demand. 3: Economic adjustment. 4: The interplay of aggregate supply and demand in a market economy. 5: The workings of a planned economy. Part II: The Workings of a Market Economy. 6: Prerequisites for a market economy. 7: Challenges posed by the market. 8: Dilemmas and problems in a market economy. 9: Why the market nevertheless is useful. Part III: Public Finance? Money, Capital, Labour, and International Trade. 10: The political economy of public finance. 11: The role of money. 12: A closer look at the capital market. 13: The labour market in a competitive economy. 14: International trade. Part IV: Privatization, Accounting, and Challenges for the Future. 15: Privatization in Central and Eastern Europe. 16: Elements of accounting. 17: From plan to market - the challenges. Index

A Note on Wage Drift: The Case of Sweden

In a previous study on wages and prices in Sweden, Jacobsson & Lindbeck (1969) were unable to show that prices influenced the formation of wages. In explaining negotiated wage changes as well as the rate of wage drift, they employed the consumer price index (CPI). However, if the supply of labor is inelastic in the short run, and if the wage rate is determined by the value of labors marginal productivity, the relevant price variable in a wage drift equation is an output price index (rather than the CPI). Using a price index for manufactured products, it is shown here that wage drift is significantly affected by price developments. An upward shift of wage drift in the early 1970s, which is difficult to explain only in terms of labor market variables (Lindbeck, 1975), is most likely due to the sharp rise in output prices during this period. Money earnings for workers in Swedish manufacturing consistently exceed the wage agreements arrived at through collective bargaining. These additional increases in earnings are called wage drift; see Hansen & Rehn (1956), p. 88. In this note some comments are offered on the four hypotheses for wage movements suggested in an earlier study by Jacobsson & Lindbeck, (1969, hereafter referred to as J&L). In the J&L study, which covered the period 1955-1967, only the labor market variable had a significant influence on wage changes collective agreements as well as wage drift2 (p. 64).