New SSE Riga/BICEPS research paper by Nicolas Gavoille (SSE Riga, BICEPS) and Anna Zasova (BICEPS).
Abstract. The interactions between minimum wage policy and tax evasion remain largely unknown. We study firm-level employment effects of a large and biting minimum wage increase in the context of widespread wage underreporting. We apply machine learning to classify firms between tax-compliant and tax-evading using a unique combination of Latvian administrative and survey data. We then show that firms engaged in labor tax evasion are insensitive to the minimum wage shock. Our results indicate that these firms use wage underreporting as an adjustment margin, converting (part of) undeclared cash payments into legal wage. Increasing minimum wage contributes to tax rule enforcement, but comes at the cost of negative employment consequences for compliant firms.
Keywords: Minimum wage, employment, tax evasion
JEL: J08, J38, H26