Abstract

The aim of this paper is to evaluate the relative effects of deterrence, prevention, curative and commitment policy measures on the size of undeclared work in Italy. To this aim, we insert this type of work into a dynamic general equilibrium model with moonlighting production, tax evasion and search frictions in the labor market calibrated on the Italian economy. The first type of policies is represented by the sanction applied to the firm being caught employing undeclared work; the second approach is encapsulated in active labor market policies targeted at improving the efficiency of declared work; the curative measures are exemplified by cuts in the labor tax rate and the commitment policies by measures able to influence the social stigma on undeclared work. The main result we reach is that all these approaches reduce the average undeclared share of output, but that deterrence and commitment policies also produce a negative effect on stationary output and employment. The active labor market approach is the one to prefer, because it produces the sharper fall in average undeclared work while stimulating stationary output and employment.