Tax Evasion and Work in the Underground Sector

A bivariate random effect panel data model is estimated for labor supply in the taxable and the nontaxable sectors in Denmark. The results show that wage rates and non-labor income have significant effects on labor supply in both sectors. For men, income taxes seem to twist the labor supply away from taxed regular to untaxed underground supply. For men, the average own wage elasticity with respect to underground labor supply is 0.3 while the cross price elasticity from regular wages is -0.6 and the income elasticity is -0.1. For women the results are more mixed