RESEARCH SEMINAR on the impact of auditing on the behaviour of companies when submitting salary and employment information, using the example of Latvia. Nicolas Gavoille, associate professor at the Riga branch of Stockholm School of Economics will present his paper „Off the books, on the books? Employment, wages, and labour tax audits“. The seminar is in English.

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Off the books, on the hooks? Employment, wages, and labor tax audits (with Anna Zasova)

This paper studies firms’ employment and wage response to labor tax audit. Using monthly-frequency administrative data from Latvia, where payroll tax evasion is prevalent, we show that the impact of audits on firms' reporting behavior is short-lived. Firm-level average reported wages and employment substantially increase during the audit period, indicating the regularization of undeclared workers. However, after the conclusion of the audit, wages and employment significantly decline vis-à-vis the pre-audit period. Employee-level results reveal that changes in the firm’s average wage are driven by newly declared employees, with limited wage adjustments for those officially employed before the audit. This suggests that labor tax audits are an effective tool for detecting undeclared workers but not for detecting wage underreporting.