The workshop will be held in English and will take place at Stockholm School of Economics in Riga, on 28th October, 2022. It will be hosted by Nicolas Gavoille, Associate Professor, SSE Riga and moderated by Prof. Arnis Sauka, SSE Riga. The aim of the Open Workshop Series in Business and Management Studies is to promote top-quality academic and applied research in various fields of the social sciences. This is a unique opportunity for sharing knowledge and networking with local and international community members.
The labor markets of many transition countries are characterized by two features: a spike at the minimum wage in wage distribution and widespread use of so-called envelope wages, i.e., non-declared cash coming in addition to the official wage. The interactions between minimum wage policy and tax evasion however remain largely unknown. In this talk, I will provide an overview of three recent papers coauthored with Anna Zasova investigating this interaction in Latvia.
First, we examine the large spike at the exactly the minimum wage in the wage distribution. Are tax evaders overrepresented among minimum wage earners? Beyond anecdotal evidence, only scarce concrete evidence documents this point. We present a body of suggestive evidence highlighting the prevalence of wage underreporting among minimum wage earners in Latvia.
Second, we use audit data and detailed administrative firm-level information to estimate the share of firms likely to underreport employees’ wage in Latvia. We train several machine learning algorithms on the set of audited firms, evaluate their out-of-sample performance and then apply them to non-audited firms. Our results indicate that nearly 40% of firms are likely to be involved in labor tax evasion, with large heterogeneity across sectors.
Third, we study firm-level employment effects of a large and biting minimum wage increase in the context of widespread wage underreporting. We 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 this comes at the cost of negative employment consequences for compliant firms.
Nicolas Gavoille is Associate Professor at SSE Riga and a research fellow at BICEPS. His main research interests are in the field of public economics and labour economics. He published articles in academic reviews such as the European Economic Review, the Journal of Comparative Economics, and the IMF Economic Review. He holds a PhD in Economics from the University of Rennes 1, France, and is a board member of the Baltic Economic Association as well as a member of the Editorial Committee of the Baltic Journal of Economics.
Discussion moderated by Prof. Arnis Sauka.
Attendance is free of charge.
To register, please fill in the following form.
Activity time: 28.10.22., plkst. 15:00-17:00, W32, at Stockholm School of Economics in Riga.
Organised by the Centre for Sustainable Business at SSE Riga and supported by ESI student innovation program. The program is co-financed by the European Regional Development Fund and supported by Printify, SEB Latvia, and Rimi Latvija. Project number: 1.1.1 .3/21/A/008.a. This workshop is supported by the Latvian Council of Science, project "Researching the Shadow Economy in Latvia (RE:SHADE)", project No. VPP-FM-2020/1-0005.