Location: Europe
What we pay in the shadows: Labor tax evasion, minimum wage hike and employment
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
Micro-level responses to socio-economic challenges in face of global uncertainties (Global2Micro) (2021 – 2023)
Baltic International Centre for Economic Policy Studies (BICEPS) is a partner in the Nordic-Baltic project Global2Micro on how companies deal with economic uncertainty.
BICEPS is participating in the Baltic Research Program project “Micro-level responses to socio-economic challenges in face of global uncertainties” (Global2Micro) funded by the European Economic Area (EEA) countries (Iceland and Lichtenstein) and Norway grants for the period 2014–2021.
The aim of the project is to achieve a deeper understanding of how firms adjust their behaviour in the uncertain and evolving environment caused by events such as an increased concentration on domestic matters and engagement in trade wars by the US, the British decision to leave the European Union and an increase in global political and economic power by China, as well as current pandemic and global lockdowns.
These broad socio-economic challenges will be tackled by analysing in detail, firstly, how firms adjust to trade and labour market shocks in terms of their labour allocations, human capital and technological investments; secondly, concentrating on how the two major adjustments of firms’ production functions – labour and technology – interact in response to increasing global uncertainty, especially in the face of deglobalisation and the fragmentation of global trade links; finally, combining the empirical insights from the first and the second blocks, and building a theoretical framework on the labour market adjustments, paying special attention to the complementarity/substitutability of new types of labour and capital as well as labour and technology (automation). The three blocks will take three different approaches – empirical analysis based on administrative data, empirical analysis based on the new big data methods, theoretical and structural analysis – and dovetail in the plan to understand the firm- and individual-level adjustments.
BICEPS will mainly contribute to the analysis of firms’ reaction to minimum wage shocks. How do firms adapt to such changes in the labour market policy? How does a minimum wage hikes affect employment? A particular characteristic of the labour markets in the region is the prevalence of the so-called “envelope wages”, i.e., unreported cash-in-hand complements to the official wage. In this setup, minimum wage policy can become a fiscal policy tool: a minimum wage hike pushes firms to convert part of the envelope into official wage to comply with the new level, so that they remain under the tax authorities’ radar. Can wage underreporting act as a buffer to absorb minimum wage shocks?
The first study completed by BICEPS researchers under the Global2Micro project is available as SSE Riga/BICEPS Research paper What we pay in the shadow: Labor tax evasion, minimum wage hike and employment.
The expected project consortium results include not less than 12 theoretical and empirical publication in high level academic journals, a number of working papers and policy notes to foster economic policy debate among economic agents and equip the policy makers with relevant economic policy tools, the creation of new databases available to economic researchers in the future, the organization of one large international conference and enhanced research network that would serve as a platform for future collaborations.
The project period runs from January 2021 until the end of 2023.
The research consortium is led by Vilnius University. Other research partners are Tallinn University of Technology, BI Norwegian Business School, University of Tartu and Hong Kong University of Science and Technology.
Marija Krumina is BICEPS project manager for the Global2Micro project. Nicolas Gavoille and Anna Zasova are BICEPS senior researchers associated with the Global2Micro project. Nicolas Gavoille is also a contact person for the project.
Project contract with the Research Council of Lithuania is S-BMT-21-8 (LT08-2-LMT-K-01-073).
Gender earnings differences in Latvia during transition
Transition and Beyond: Women on the Labour Market in the Context of Changing Social Norms. A new FROGEE policy brief on the situation in the region, containing an overview of the situation in Latvia written by Anna Zasova (BICEPS).
After a short overview of women’s position on the labour market, this brief presents a simple exercise focusing on the top of the earnings distribution, which illustrates the development of gender earnings differences in Latvia since 1996. The results suggest that Latvian women are well-represented among top earners: the share of women in the top earnings percentile is about 30%. This share was growing until mid-2000s, but since then it has been gradually declining . The gender gap in median earnings is the largest at the top end of the distribution. We also show that older workers faced the largest gender earnings gap in 1996, but it has been steadily declining since then.
The full Report is available here.
Reports from Armenia, Belarus, Georgia, Poland, Ukraine and Russia are available in English and the national languages here.
About FROGEE Policy Briefs
FROGEE Policy Briefs is a special series aimed at providing overviews and the popularization of economic research related to gender equality issues. Debates around policies related to gender equality are often highly politicized. We believe that using arguments derived from the most up to date research-based knowledge would help us build a more fruitful discussion of policy proposals and in the end achieve better outcomes.
The aim of the briefs is to improve the understanding of research-based arguments and their implications, by covering the key theories and the most important findings in areas of special interest to the current debate. The briefs start with short general overviews of a given theme, which are followed by a presentation of country-specific contexts, specific policy challenges, implemented reforms and a discussion of other policy options.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Fertility enhancing policies in Latvia
Economics of Childbearing and Pronatalist Policies. A new FROGEE policy brief on the situation in the region, containing an overview of the situation in Latvia written by Nicolas Gavoille (SSE Riga, BICEPS), Anna Pļuta (BICEPS) and Anna Zasova (BICEPS)
Latvia is a country with a relatively low fertility rate. In the a late nineties and the first half of the 2000s, a persistently negative net migration ratio and a declining population made the fertility rate a particularly sensitive political issue and Latvia introduced a range of fertility enhancing programs, most of which are available to parents with children nowadays. In this brief, we argue that while these programs are likely to have played an important role in encouraging fertility, the exact impact is hard to identify. The reason is that the government spending on family and children-related measures in recent years had a strong procyclical pattern , which makes it practically impossible to disentangle the effect of the policies from the effect of the economic cycle.
The full Report is available here.
Reports from Armenia, Belarus, Georgia, Poland, Ukraine and Russia are available in English and the national languages here.
About FROGEE Policy Briefs
FROGEE Policy Briefs is a special series aimed at providing overviews and the popularization of economic research related to gender equality issues. Debates around policies related to gender equality are often highly politicized. We believe that using arguments derived from the most up to date research-based knowledge would help us build a more fruitful discussion of policy proposals and in the end achieve better outcomes.
The aim of the briefs is to improve the understanding of research-based arguments and their implications, by covering the key theories and the most important findings in areas of special interest to the current debate. The briefs start with short general overviews of a given theme, which are followed by a presentation of country-specific contexts, specific policy challenges, implemented reforms and a discussion of other policy options.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
EUROMOD: Latvijas ekonomikas mikrosimulācijas modeļa izveide, izmantojot EU SILC datus (kopš 2010. gada)
EUROMOD is a tax-benefit microsimulation model for the European Union that enables researchers and policy analysts to calculate, in a comparable manner, the effects of taxes and benefits on household incomes and work incentives for the population of each country and for the EU as a whole. Cross-country comparability is enabled by coding the policy systems of the EU Member States according to a common framework based on a standard set of modelling conventions. The EUROMOD platform is highly flexible but also organised, documented, validated and transparent. Underpinning the model is the purpose-built software comprising a user-friendly interface, supplemented by extended functionalities (plugins and add-ons) for special purpose analysis.
Originally maintained, developed and managed by the Institute for Social and Economic Research (ISER) of the University of Essex, since 2021 EUROMOD is maintained, developed and managed by the Joint Research Centre (JRC) of the European Commission, in collaboration with Eurostat and national teams from the EU countries.
The Latvian national team is based at BICEPS. The current team members are:
- Anna Pļuta, BICEPS, Research fellow
- Anna Zasova, BICEPS, Research fellow.
Latest country report is available here.
Project funded by DG Employment.
Inflation in the Baltic States and Other EU New Member States: Similarities, Differences and Adoption of the Euro
New SSE Riga/BICEPS occasional paper by Morten Hansen (SSE Riga) and Alf Vanags (BICEPS).
Abstract. This paper examines the inflation experience of the EU new member states (NMS) since 2000, with particular focus on the three Baltic countries – Estonia, Latvia and Lithuania. Apart from being a natural focus of interest for residents of these countries it appears that their recent inflation experience – accelerating inflation in all three, with Latvia and Estonia posting the two highest NMS inflation rates in 2005 – marks them out from the other NMS. Indeed Latvia is now the country with the highest inflation rate in all of the EU. At the same time the actual levels of inflation are different across the three Baltic countries. So the central questions addressed in the paper concern the reasons behind the acceleration of inflation in the Baltic states when such an acceleration has not been observed in the other NMS and how to reconcile the ‘common Baltic acceleration’ with the observation that levels of inflation in the three countries remain different.
For Baltic governments who are pondering policy actions to reduce inflation the message is clear – if there is a serious intention to reduce inflation, then domestic demand needs to be reduced and if monetary policy is not available because of the constraint of pegged exchange rates then fiscal instruments must be used i.e. higher taxes or lower public expenditure or both. It will be painful – growth will decline, unemployment will rise and perhaps the property boom will collapse – but it will work.
A second shorter part of the paper briefly discusses the EMU convergence criteria and argues that the inflation criterion, the one which each of the Baltic states fail to meet, is increasingly unlikely to be met, partly due to fiscal policy negligence and partly due to the criterion being increasingly meaningless and unfair and that euro adoption may have to be postponed for quite a long time.
The paper is intended to be part of the current, hot economic-political discussion on inflation and euro adoption in the Baltics and thus on purpose avoids too much detailed economic theory.