Minimum Wage and Tax Evasion: Theory and Evidence
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This paper examines the interaction between minimum wage legislation and tax evasion by employed labor. I develop a model in which fi rms and workers may agree to report less than the true amount of earnings to the fiscal authorities. I show that introducing a minimum wage creates a spike in the distribution of earnings and induces higher compliance by some agents, thus reducing their disposable income. The comparison of food consumption before and after the massive minimum wage hike that took place in Hungary in 2001 reveals that households affected by it experienced a drop compared to similar but unaffected household, thus supporting the prediction of the theory.