The minimum wage, informal pay, and tax enforcement (Bíró et al. 2022)

Journal of Public Economics, DOI: 10.1016/j.jpubeco.2022.104728

We study the implications of the minimum wage for taxation in an environment with imperfect enforcement and informality. Leveraging an increase in the audit threat for declared earnings below a threshold at twice the minimum wage in Hungary, we estimate reporting and employment responses with administrative panel data. Our bunching and difference-in-differences results show that a substantial share of those who report earning the minimum wage earn at least the same amount off the books. Our key insight is that a taxed minimum wage serves as a backstop on underreporting and recovers some revenue —even though it also increases informality.