The Perverse E ect of Flexible Labor Regulation on Informality

Several developed countries are introducing more exible work arrangements with a multitude of di erent contracts ranging from Germany's mini-jobs, to UK's zero-hours contracts. Back in 2008 Italy introduced what is arguably the most exible alternative work arrangements (AWA), called labor vouchers. Apart from allowing for quick labor demand adjustments, such contracts were seen as a way to ght undeclared work. Until recently labor vouchers could be purchased online and from mom and pops stores to pay for all sorts of occasional work, with little to no additional paper work. Between 2008 and 2016 the use of labor vouchers went up from 500,000 (less than 1 per 100 inhabitants) to almost 300 million vouchers (5 times the Italian population). Using random timing in labor inspections as well as the abolition of labor vouchers we document a perverse e ect of badly designed AWAs: they lead to more rather the less undeclared work. The reason is that when inspected rms use vouchers to hide any undeclared work, which we de ne as gray work.