Utility-Based Estimation of Labour Supply Functions in the Regular and Irregular Sectors.

Recent theoretical work on labor supply has shown that the tax and transfer system can induce some individuals to work in the irregular labor market. Models designed to represent such behavior are unable to sign unambiguously the impact of the marginal tax rate as well as many key exogenous parameters on the hours supplied in the irregular market except under strong restrictions on preferences. In this paper, the authors estimate a simultaneous labor supply model that allows testing some of the more common assumptions found in the literature, using a unique data set on the underground economy of the metropolitan area of Quebec City, Canada. Estimates of elasticities with respect to predetermined variables are presented. Moreover, they test and empirically reject the assumptions of perfect substitution between regular and irregular work activities as well as additive separability of the utility function. Copyright 1992 by Royal Economic Society.