Under-reporting of income and labor market performance

To examine the effects on labor market performance of govern-ment tax and enforcement policies, this paper develops an equilibrium model featuring tax evasion, matching frictions, and worker-firm wage bargains. In the wage bargains, workers and firms can agree on the amount of remuneration that should not be reported to the tax author-ities. We find that increased taxation actually reduces unemployment, whereas more zealous enforcement has the opposite effect