Informal Unemployment and Education

This paper develops a four sector equilibrium search and matching model with informal sector employment opportunities and educational choice. We show that underground activities reduce educational at- tainments if informal employment opportunities mainly are available to low educated workers. More zealous enforcement policy will in this case improve educational incentives as it reduces the attractiveness of remaining a low educated worker. Characterizing the optimal enforce- ment policies, we nd that relatively more audits should be targeted towards the sector employing low educated workers, elsewise a too low stock of educated workers is materialized.