Abstract
Taking into account the risk to be fined firms maximize their expected profits and workers their expected utility by determining the optimal demand for and supply of homogenous legal and black labour inputs. Comparative static results are presented showing how a change in the tax rate, in the black and legal wage rate as well as in the probability to be fined affects individual and market demand for and supply of black (legal, total) labour hours. Employment in the black labour market rises if the tax rate rises provided that the probability to be fined does not exceed a critical level. The same will be true if the probability to fined is lowered and if the demand for total labour hours becomes constrained because of firms being rationed in the product market and the legal wage rate being inflexible.KeywordsWage RateExpected ProfitShadow EconomyTotal LabourComparative Static ResultThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
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