State capacity, tax evasion, and wage inequality

Abstract

This paper explores how state capacity in the sense of controlling tax evasion affects wage inequality through constructing several general equilibrium models. We analyse six types of redistribution in urban areas, and find that effect variations in urban wage inequality arise depending on the specific recipients of redistribution. Notably, under redistribution to urban unskilled labour, changes in wage inequality will depend on the capital intensity of the urban skilled sector when state capacity increases.