nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2011‒12‒13
thirteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Persistence of Informality: Evidence from Panel Data By Akay, Alpaslan; Khamis, Melanie
  2. Informality and the expansion of social protection programs By Azuara, Oliver; Marinescu, Ioana
  3. Informal Sector Dynamics In Times Of Fragile Growth: The Case Of Madagascar By Michael Grimm; Jann Lay; François Roubaud; Julia Vaillant
  4. Intergenerational transmission of self-employed status in the informal sector: a constrained choice or better income prospects? Evidence from seven West-African countries By Laure Pasquier-Doumer
  5. Evidence on the impact of minimum wage laws in an informal sector: Domestic workers in South Africa By Dinkelman, Taryn; Ranchhod, Vimal
  6. Financial Development and the Underground Economy By Salvatore Capasso; Tullio Jappelli
  7. Does the EU financing system contribute to shadow economic activity? By Theilen, Bernd, 1965-; Herwartz, Helmut
  8. Income Tax Evasion Dynamics: Evidence from an Agent-based Econophysics Model By Michael Pickhardt; Goetz Seibold
  9. The Effect of Low Corporate Tax Rate on Payroll Tax Evasion By Boryana Madzharova
  10. Tax Evasion and Presumptive Taxation Methods. A Case Study in Italy: Sector Studies By Giuseppe Pulina
  11. Compliance with the Institutional Wage in Dualistic Models By Ana Paula Martins
  12. Informal social networks, organised crime and local labour market By Antonella Mennella
  13. International Human Trafficking: Theory and Solution By Mo, Pak Hung

  1. By: Akay, Alpaslan (IZA); Khamis, Melanie (Wesleyan University)
    Abstract: Informality is a growing phenomenon in the developing and transition country labor market context. In particular, it is noticeable that working in an informal employment relationship is often not temporary. The degree of persistence of informality in the labor market might be due to different sources: structural state dependence due to past informality experiences and spurious state dependence due to time-invariant unobserved individual effects, which can alter the propensity of being in the informal sector independently from actual informality experiences. The purpose of our paper is to study the dynamics of informality using a genuine panel data set in the Ukrainian labor market. By estimating a dynamic panel data probit model with endogenous initial conditions, we find a highly significant degree of persistence due to previous informality experiences. This result implies that policies attempting to reduce current levels of informality may have a long-lasting effect on the labor market.
    Keywords: state dependence, unobserved heterogeneity, informality, transition countries
    JEL: D60 I31
    Date: 2011–11
  2. By: Azuara, Oliver; Marinescu, Ioana
    Abstract: This paper examines the impact of the expansion of social protection programs on informality using the case of Mexico. A social protection system based on two components was created during the last decade in the country. The first is Seguro Popular which provides a minimum set of health benefits to the population not covered by formal social security. The other component of the system is a conditional cash transfer called Oportunidades. Both theoretically affect incentives to work in the informal sector. Seguro Popular decreases the cost of working informally and Oportunidades increases the benefits of concealing income by working informally. Using the fact that both systems were introduced in different municipalities at different times, we show that, surprisingly, neither significantly affected overall informality. While informality significantly increased for some sub-groups after the introduction of Seguro Popular, the increase was less than 2 percentage points. We also find no effect of Seguro Popular on transitions between formal and informal jobs, and no effect on wage differentials between the formal and the informal sector. These results suggest that payroll financed health insurance does not affect wages or labor mobility in Mexico. Overall, Mexico’s expansion of social protection system came at little to no cost in terms of labor supply distortions.
    Keywords: Informality; Social Protection; Labor; Health; Seguro Popular; Oportunidades; Mexico
    JEL: J08 C32 I18 J48
    Date: 2011–10–01
  3. By: Michael Grimm (Institute of Social Studies, The Hague, DIW and DIAL); Jann Lay (German Institute of Global and Area Studies,Hamburg); François Roubaud (DIAL, IRD, Paris); Julia Vaillant (Université Paris Dauphine, LEDa UMR 225 DIAL, IRD)
    Abstract: (english) This paper investigates the dynamics of the informal sector in Madagascar during a period of fragile growth. Overall, the behavior of informal firms in terms of earnings, employment and capital accumulation points to a degree of heterogeneity which goes beyond a simple dualistic model and even a more refined model that would distinguish between an upper entrepreneurial and a lower subsistence tier within the informal sector. However, in line with the dualistic model, the informal sector indeed fulfils a labor absorbing function in times of crisis. During the growth period we see capital accumulation in most of the sectors and lots of evidence that households expand their activities. However, this happens mainly through the creation of new firms instead of the expansion of existing ones, which is consistent with much higher returns at very low levels of capital. More rapid expansion can be observed in sectors that operate with lower capital intensity, which is also consistent with risk or credit constraints as major deterrents to expansion. While there is some indication that total factor productivity increased over time, returns to capital and labor where not higher at the end of the observation period than at the beginning. Returns are also rather low at high levels of capital. These findings point to a limited growth potential of the informal sector as a whole. The heterogeneity in capital returns hints at large inefficiencies in allocating capital across informal firms. _________________________________ (français) Cet article examine la dynamique du secteur informel à Madagascar pendant une période de croissance fragile. Le comportement des firmes informelles en termes de revenus, d’emploi et d’accumulation du capital suggère un degré d’hétérogénéité allant au-delà du modèle dualiste classique, et même d’un modèle plus fin distinguant, au sein du secteur informel, un segment entrepreneurial et un segment de subsistance. Cependant, conformément au modèle dualiste, le secteur informel a absorbé le surplus de travail en temps de crise. Pendant la période de croissance, on constate une accumulation de capital dans la plupart des secteurs d’activité et une expansion des activités des ménages. Ceci se traduit pourtant principalement par la création de nouvelles firmes plutôt que par la croissance de firmes existantes, en lien avec des rendements beaucoup plus élevés à des faibles niveaux de capital. Une expansion plus rapide peut être observée dans les secteurs à faible intensité capitalistique, ce qui tend également à confirmer que le risque et les contraintes de crédit sont des obstacles à l’expansion. Alors que les résultats montrent que la productivité totale des facteurs a augmenté, les rendements du capital et du travail ne sont pas plus élevés à la fin de la période étudiée qu’au début. Les rendements sont également plutôt faibles à des niveaux élevés de capital. Ces résultats indiquent un potentiel de croissance globalement limité des firmes informelles. Enfin, l’hétérogénéité des rendements du capital plaide en faveur d’une allocation sous-optimale du capital dans le secteur informel.
    Keywords: Informal sector, microenterprise, firm growth, capital returns, Madagascar, Secteur informel, micro-entreprises, croissance des firmes, rendement du capital, Madagascar.
    JEL: O12 O17 L26 D22
    Date: 2011–09
  4. By: Laure Pasquier-Doumer (DIAL, IRD, Paris)
    Abstract: Social reproduction is the highest for self-employed as shown by an extensive literature from developed and developing countries. Very few studies however document the reason for this high intergenerational correlation of the self-employed status. The rare studies that have been done concern the US and show that children of self-employed benefit from an advantage when they are themselves self-employed. The purpose of this paper is to test if the second-generation of self-employed has an advantage related to the first-generation in the African context. It aims at highlighting the debate on firms heterogeneity in the informal sector, and seeks to contribute to understand the intergenerational transmission of inequalities. Using 1-2-3 surveys collected in the commercial capitals of seven West African countries in 2001-2002, this paper shows that the second-generation of informal selfemployed does not have better outcomes than the first one, except when they choose a familial tradition in the same sector of activity. Thus, in the African context, having a self-employed father does not provide any advantage in terms of profit or sales and is not sufficient for the transmission of valuable skills. On the other hand, informal entrepreneurs who have chosen a specific enterprise based on familial tradition have a competitive advantage. Their competitive advantage is partly explained by the transmission of enterprise-specific human capital, acquired through experiences in the same type of activity and by the transmission of social capital. _________________________________ Très peu d’études documentent les raisons la très forte reproduction sociale observée parmi les entrepreneurs, aussi bien dans les pays développés que dans les pays en développement. Les rares études, portant sur les E.U, montrent que les enfants d’entrepreneurs ont de meilleures performances quand ils sont eux-mêmes entrepreneurs que les enfants de salariés. Cet article teste si ce résultat se vérifie dans le contexte du secteur informel ouest-africain et cherche à en comprendre les raisons. Il vise par conséquent à éclairer le débat portant sur l’hétérogénéité des entreprises informelles, en identifiant des facteurs de succès, mais il cherche aussi à mieux comprendre les mécanismes à l’origine de la transmission intergénérationnelles des inégalités en Afrique. En se basant sur les enquêtes 1-2-3 collectées dans sept capitale ouest-africaines, cet article montre que la seconde génération d’entrepreneurs informels ne bénéficient pas d’un avantage comparatif, sauf s’ils bénéficient d’une tradition familiale dans leur secteur d’activité. Ainsi, dans le contexte ouest-africain, avoir un père entrepreneur ne suffit pas à la transmission de compétences managériales. En revanche, les entrepreneurs qui ont choisi leur secteur d’activité par tradition familiale ont un avantage qui s’explique principalement par la transmission de compétences spécifiques au secteur d’activité et par la transmission d’un capital social.
    Keywords: Informal sector, entrepreneurship, intergenerational link, human capital,Secteur informel, entreprenariat, lien intergénérationnel, capital humain.
    JEL: L26 J24 J62
    Date: 2011–09
  5. By: Dinkelman, Taryn; Ranchhod, Vimal
    Abstract: What happens when a previously uncovered labour market is regulated? We exploit the introduction of a minimum wage in South Africa and variation in the intensity of this law to identify increases in wages for domestic workers and find no statistically significant effects on the intensive or extensive margins of work. These large, partial responses to the law are somewhat surprising, given the lack of monitoring and enforcement in this informal sector. We interpret these changes as evidence that strong external sanctions are not necessary for new labour legislation to have a significant impact on informal sectors of developing countries, at least in the short-run.
    Keywords: africa; domestic workers; informal sector; minimum wage
    JEL: J08 J23 J38
    Date: 2011–12
  6. By: Salvatore Capasso (Department of Economics, University of Naples 'Parthenope', and CSEF); Tullio Jappelli (University of Naples Federico II, CSEF and CEPR)
    Abstract: We provide a theoretical and empirical study of the relation between financial development and the size of the underground economy. In our theoretical framework agents allocate investment between a low-return technology which can be operated with internal funds, and a high-return technology which requires external finance. Firms can reduce the cost of funding by disclosing part or all of their assets and pledging them as collateral. The disclosure decision, however, also involves higher tax payments and reduces tax evasion. We show that financial development (a reduction in the cost of external finance) can reduce tax evasion and the size of the underground economy. We test the main implications of the model using Italian microeconomic data that allow us to construct a micro-based index of the underground economy. In line with the model’s predictions, we find that local financial development is associated with a smaller size of the underground economy, controlling for the potential endogeneity of financial development and other determinants of the underground economy.
    Keywords: Underground Economy, Financial Development.
    Date: 2011–11–28
  7. By: Theilen, Bernd, 1965-; Herwartz, Helmut
    Abstract: Financial contributions to the EU budget depend basically on official GDP. This means that countries with higher shadow economic activity contribute less than they should contribute in a system based on actual GDP and therefore could reduce their incentive to fight against such activities. In this paper we investigate if the EU financing system really has an influence on the intensity with which governments in EU member states fight against shadow economic activity. We find that the EU net contributors significantly fight more intensively against shadow economic activity while EU net receivers significantly fight less. As a result, shadow economic activity is higher in net receiver and lower in net contributor countries than it were in comparison with a scenario of nationally balanced EU funding. Quantitatively and averaged over the time period 2001-2007, the diagnosed effect amounts to a stimulation of hidden economic activity by almost 10% for particular economies. JEL classification: C31, D63, F33, H21, H26. Keywords: EU financing system, shadow economy, tax auditing.
    Keywords: Finances públiques -- Unió Europea, Països de la, Pressupost -- Unió Europea, Països de la, Economia submergida, 339 - Comerç. Relacions econòmiques internacionals. Economia mundial. Màrqueting,
    Date: 2011
  8. By: Michael Pickhardt; Goetz Seibold
    Abstract: We analyze income tax evasion dynamics in a standard model of statistical mechanics, the Ising model of ferromagnetism. However, in contrast to previous research, we use an inhomogeneous multi-dimensional Ising model where the local degrees of freedom (agents) are subject to a specific social temperature and coupled to external fields which govern their social behavior. This new modeling frame allows for analyzing large societies of four different and interacting agent types. As a second novelty, our model may reproduce results from agent-based models that incorporate standard Allingham and Sandmo tax evasion features as well as results from existing two-dimensional Ising based tax evasion models. We then use our model for analyzing income tax evasion dynamics under different enforcement scenarios and point to some policy implications.
    Date: 2011–12
  9. By: Boryana Madzharova
    Abstract: It is a commonly held view that the widespread policy of cutting the corporate income tax has a positive effect on taxable income through decreasing firms' incentive to hide profits. A neglected side of this policy, however, is its potential to trigger more evasion in other tax bases, such as the social security base, especially if the corporate income tax rate is low compared to the payroll rate. We develop a model in which employers and employees cooperate in declaring lower wages to the tax authorities in order to evade payroll contributions. Since wages and payroll taxes are a deductible expense for firms, a lower reported wage translates into higher corporate profits on paper and hence, shifting of tax liability out of social security into the corporate tax base. Using firm-level panel data for Bulgaria, where the problem of contribution evasion is prevalent, we find that a 1% increase in the net-of-tax-share of the corporate tax rate reduces reported wages in the economy by .21%, but leads to higher taxable incomes. An identical increase in the payroll net-of-tax-share results in a .28% rise in wages. Thus, even though the separate tax bases respond significantly to changes in the corporate tax rate, the impact on the combined tax base of wages and taxable incomes is estimated to be small.
    Keywords: corporate tax; payroll tax; evasion; wage underreporting;
    JEL: H25 H26 H55 J3
    Date: 2011–09
  10. By: Giuseppe Pulina
    Abstract: In this paper we analyze a fiscal mechanism used in Italy, which in Italian is called “Studi di Settore” (Sector Studies). This mechanism relies on information gathered on taxpayers to both partition the population into fairly homogeneous clusters and to determine the presumed income they should declare. When this estimated income is announced, before taxpayers fill out their tax returns, their optimal declaration strategies lead the tax- payer population to be naturally split into three homogeneous groups, one of which pays more taxes than are due, the second group comply but bears the audit cost, while the third evades and it is not audited. This result is close to the Italian situation where the greatest number of taxpayers make a tax declaration according to the announced cluster income, but there are always those who declare less and so are audited.
    Keywords: Tax Evasion; "cut-off" policy; Noncooperative games; Asymmetric Information
    JEL: H26 H32 D82 C72
    Date: 2011
  11. By: Ana Paula Martins
    Abstract: This research extends simple two-sector models in order to inquire the impact of the extent of coverage or enforcement of minimum wage legislation in one of the sectors on the equilibrium outcome. Two versions of institutional wage avoidance are presented. They may be seen as representing different institutional detection rules: one working through worker complaint, the other through firm sampling inspection (and enforcement) by the legal system. Both cases are modelled as enlargements of two dualistic models: Harris-Todaro (the wage in the other sector is market determined) and Bhagwati-Hamada (the wage in the other sector is institutionally fixed and coverage is complete). Impact on population flows of changes in degree of coverage (compliance) is also confronted with the effect of a change in the institutional wage for each scenario.
    Keywords: Migration, Mobility, Minimum Wages, Segmented Labor Markets, Informal Sector, Regional Labor Markets, Dualistic Models, Coverage.
    JEL: O15 O17 O18 R23 J38 J42 J61 J62 F22 K42
    Date: 2011–11–15
  12. By: Antonella Mennella
    Abstract: This paper’s purpose is to show a new informal social networks interpretation, according to which social networks change their nature if they are located in social contexts where organised crime is relevant. Here the perusal of a social network is just a necessary condition to enter the labour market rather than a deliberate choice. Moreover this labour market is the ground where favouritisms and social and electoral consensus policies take place
    Keywords: social networks, organised crime, labour market
    JEL: D85 J64 K00
    Date: 2011–03
  13. By: Mo, Pak Hung
    Abstract: In this paper, we build a simple model to explain the choice of migration method and the root causes of international human trafficking (IHT). Our analyses result in several implications on the problems related to IHT. First, IHT is driven by poverty and international productivity/living quality disparities. Second, the existing humanitarian and/or suppressive approaches cannot solve the problem. Third, the best option for solving the problem is setting up the ‘reciprocal direct investment’ (RDI) scheme between leading and lagged economies.The RDI scheme can facilitate improvements in the quality of public governance in lagged economies and directly promote international competition, efficiency, trade liberalization and division of labor. The resulting convergence in global living quality at a higher level across nations will eliminate the root causes of illicit migrations.
    Keywords: human trafficking; global development; income disparities
    JEL: O4
    Date: 2011–11

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