Social norm, the informal sector and unemployment

While examining the macroeconomic effects of increased government <p> control of the informal sector, this paper develops a two-sector general <p> equilibrium model featuring matching frictions on the labour market and <p> a social norm. Conducting informal work, or employing a worker infor- <p> mally, is associated with expected punishment fees and payments of a <p> moral cost, given that there is a social norm against tax evasion. This <p> framework facilitates an analysis of how wage setting, unemployment and <p> the size of the informal sector are affected by punishment policies, which <p> has been ignored in the previous literature. Furthermore, the inclusion of <p> an endogenously determined norm against tax evasion may explain differences in-between regions or countries in relative sizes of the formal and the informal sectors for similar tax- and punishment policies. <p>