I have built a monetary DSGE model to investigate how wage underreporting in an economy characterized by a minimum wage regime affects the macroeconomic response to a minimum wage increase. The model is calibrated and estimated for Ukraine. The main result is that under a higher degree of wage underreporting, the economy is less responsive to a minimum wage shock. Quantitatively, the magnitude of the response to a minimum wage shock is affected by the share of non-Ricardian households, that is, households that do not have access to financial markets and consequently consume all of their income each period.
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