In this paper, we examine the impact of tax rate and firing costs on the size of the informal sector and unemployment using a dynamic general equilibrium model that includes search. Our results show that an increase in tax increases the size of the informal sector but reduces the unemployment rate. However, an increase in the firing costs decreases the size of the informal sector but increases the unemployment rate. The results obtained in this paper indicate that policies to reduce firing costs as opposed to reducing income tax would be better at reducing unemployment. Although, it would lead to an increase in the size of the informal sector, our view is that the benefits outweigh the costs.
The Impact of Tax and Firing Costs on the Size of the Informal Sector and Unemployment.
DELL'ANNO, Roberto;
2009-01-01
Abstract
In this paper, we examine the impact of tax rate and firing costs on the size of the informal sector and unemployment using a dynamic general equilibrium model that includes search. Our results show that an increase in tax increases the size of the informal sector but reduces the unemployment rate. However, an increase in the firing costs decreases the size of the informal sector but increases the unemployment rate. The results obtained in this paper indicate that policies to reduce firing costs as opposed to reducing income tax would be better at reducing unemployment. Although, it would lead to an increase in the size of the informal sector, our view is that the benefits outweigh the costs.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
