extra dollar of reported earnings translates into significantly more benefits since 2015. Panel (c) shows that aggregating costs over six months (for comparability between the two periods), the total cost to the employer is $7.62 ($3.93 in net earnings and $3.69 in taxes). Panel (d) shows that aggregating over twenty-four months the employee gained $4.82 in net benefits before December 2014 and $12.85 after January 2015. Panel (e) shows that in total the employee gained $8.75 ($3.93 in net earnings and $4.82 in net benefits) before December 2014 and $16.78 ($3.93 in net earnings and $12.85 in net benefits) from January 2015. Also displayed in panel (e), the difference between the cost paid by the employer and the gain to the employee ($1.13 before December 2014 and $9.16 after January 2015) is a transfer from the government to the employee.

The second and fourth columns show a scenario in which income taxes are evaded. Gross reported earnings can be increased, resulting in higher income tax and social security contributions without changing net earnings, assuming the same net earnings were previously paid as unreported (envelope) wage, a common phenomenon in Hungary and the broader region (Elek et al., 2012; Williams and Padmore, 2013; Paulus, 2015; B ́ır ́o et al., 2022; Gavoille and Zasova, 2023 _a_ , _b_ ). Panel (a) shows that increasing reported monthly earnings by $1 costs $0.62 in taxes and contributions each month. Panel (b) shows that before December 2014, the employee received $0.20 of extra net benefits each month, which increased to $0.54 from January 2015. Panel (c) shows that aggregating costs over six months, the total cost to the employer is $3.69 (solely due to previously unpaid taxes and contributions). Panel (d) shows that aggregating benefits over twenty-four months, the employee gains $4.82 before December 2014 and $12.85 from January 2015, solely due to higher benefits as net wages do not change.

The gains of the employee from a (reported) earnings increase during the reference window always exceeded the costs to the employer, but they became 1.9-2.7 times higher after 2015. If the earnings increase was only a change in reporting behavior without a change in net earnings, then its costs to the employer were lower (only higher taxes, but not higher wages), but the benefits to the employee were also lower by the same magnitude (higher benefits but not higher wages), while the total cost to the government was the same in the two scenarios (government costs depend on taxes and benefits, but not directly on wages). The cases displayed in Table 1 are edge cases: they assume either no tax evasion or that the marginal dollar of extra gross earnings comes fully from an adjustment to envelope wages. Intermediate cases are also possible, with some adjustment to both net earnings and the envelope vs. official share in compensation.

# **3 Data and Sample**

We use administrative data from Hungary on employment, earnings, benefits, education, and health for a 50% random sample of the population, defined in January 2003 and followed until December 2017. We observe employment status and type (private sector employee, public sector employee, or self-employed) for each month. For private sector employees, we observe firm, occupation, and industry. For double-bookkeeping firms, we observe the annual average firm 5