Abstract

The theory of dual labour markets suggests that the relation between minimum wages and undeclared employment is ambiguous, as higher mandated wages can generate flows of workers both in and out the undeclared labour market. Furthermore, the empirical evidence is still scarce and only limited to developing economies. In this paper, I take advantage of a unique dataset provided by the Italian national statistical office to test the relation between collective bargaining wage floors and undeclared employment. I use regional macrosectoral panel data over the 2005-2012 period. As collective bargaining sets minima covering almost the entire distribution of occupations, the potential effects on employment should be large. Indeed, my results indicate that the elasticity of undeclared employment stocks to marginal changes in the minimum wage level is positive and equal to 3.4. Quite unexpectedly, I also find that the estimated elasticity is higher in the Northern regions than in the rest of the country.