Analysis of the Effectiveness of the Policy against the Informal Labor Market with DSGE Model, Estimated for the Russian Economy

Up to 25% of the working population in Russia is employed in the shadow sector of the labor market, which has a negative impact on economic development. Thus, it is important to identify the most effective state policies to control undeclared economic activity. We created a DSGE-model to assess the effect of fiscal, monetary, and administrative tools on the shadow sector. We introduced the risk of detection of tax evasion contemplated by a firm in the informal sector. We found that government expenditures cut was the most effective tool in controlling the undeclared market activity, leading to a positive medium-term effect on tax collection dynamics and GDP. The impact of other monetary and fiscal tools (tax reduction, credit easing) was less continuous. Administrative tools (rise of the effectiveness of tax controls or corresponding penalty fees) has a positive effect on decreasing the share of informal market, however, the assessment of their real impact on the economy should be adjusted for the existing level of corruption.