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Informal Payments And The Financing Of Health Care In Developing And Transition Countries

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Executive Summary

This paper examines the interaction between minimum wage legislation and tax evasion by employed labor. The author develops a model in which firms and workers may agree to report less than the true amount of earnings to the fiscal authorities, and show that introducing a minimum wage creates a spike in the distribution of declared earnings and induces higher compliance by some agents, thus reducing their disposable income. The comparison of food consumption and of the consumption-income gap before and after the massive minimum wage hike that took place in Hungary in 2001 reveals that households who appear to benefit from the hike actually experienced a drop compared to similar but unaffected household, thus supporting the prediction of the theory.

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