Tax Evasion, Minimum Wage Non-Complianceand Informality

We study the impact of tax and minimum wage reforms on the incidence of informality. Togauge the incidence of informality, we use measures of the extent of tax evasion, the extentof minimum wage non-compliance, and the size of the informal workforce. Our approachallows us to examine (i) the distinction between determinants of firm-level reported wagedistribution and actual wage distribution, (ii) the complementarity of tax and minimum wageenforcement, (iii) the impact that a minimum wage reform has on tax and minimum wagecompliance, and (iv) the impact that a tax policy reform has on tax and minimum wagecompliance. We conclude with the design of optimal minimum wage and tax policies (even inthe complete absence of minimum wage enforcement). We do so based on two objectivesderived from popular concerns associated with an unchecked expansion of informality: tax revenue maximization, and poverty alleviation among workers...