An Empirical Model of Illegal Work

This paper develops a model of workers choosing legal or illegal employment, where legality is defined as abiding by the minimum wage and participating in a set of payroll taxes and mandated non-wage benefits. Alternatively, agents may opt to be legally or illegally self-employed. Enforcement of a minimum wage law creates a clump of illegal workers at the minimum wage. The model is directly estimable either with maximum likelihood or quantile regression and identifies the costs of evading labor laws. Estimating the model on Brazilian data suggests that the financial costs of evasion are minimal