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Underreporting Of Earnings And The Minimum Wage Spike

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Executive Summary

This paper documents a positive correlation within European labor markets between the proportion of full-time employees with earnings on the minimum wage and the extent of underreporting of earnings in the economy. Using a simple model of a competitive labor market, the author shows how this correlation can emerge as a result of the common dependence of both quantities on the strength of enforcement of fiscal regulation. This suggests that a high spike in the wage distribution at the minimum wage level is, in some contexts, an issue of fiscal enforcement, more than a labor market issue.

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