An Empirical Model of Labor Supply in the Underground Economy

Bernard Fortin, Thomas Lemieux, Pierre Frechette

NBER Working Paper No. 3392
Issued in June 1990
NBER Program(s):   LS

This paper uses micro data from a random survey carried out in the region of Quebec City, Canada, to estimate a model of labor supply in the underground economy. The model assumes that the individual's gross wage rate in the regular sector is parametric while his gross labor earnings in the underground sector are a concave function of hours of work. This distinction between the two sectors is used to generate a simple separation result between preferences and the magnitude of underground labor market activities. This result implies that the individual's labor supply in the underground economy is generally a negative function of his net wage rate in the regular sector. The separation result also implies a set of restrictions on the parameters of the reduced form of the model, which are imposed using minimum distance methods of estimation. Various generalized method of moments specification tests allow us to verify the validity of these restrictions. According to our results, the marginal tax rates embodied in the Quebec tax-transfer system are an important determinant of the decision to participate in the underground sector.

download in pdf format
   (357 K)

email paper

This paper is available as PDF (357 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3392

Published: American Economic Review , vol.84, no.1, pp.231-254, March 1994.

Users who downloaded this paper also downloaded these:
de la Rica and Lemieux w4402 Does Public Health Insurance Reduce Labor Market Flexibility or Encourage the Underground Economy? Evidence from Spain and the United States
Gorodnichenko, Martinez-Vazquez, and Sabirianova Peter w13719 Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia
Davis and Henrekson w10509 Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons
Slemrod and Yitzhaki w7473 Tax Avoidance, Evasion, and Administration
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us