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on Informal and Underground Economics |
| By: | Batini, Nicoletta (IMF and University of Surrey); Levine, Paul (University of Surrey); Lotti, Emanuela (University of Surrey); Yang, Bo (University of Surrey) |
| Abstract: | How does informality in emerging economies affect the conduct of monetary and fiscal policy? To answer this question we construct a two-sector, formal-informal new Keynesian closed-economy. The informal sector is more labour intensive, is untaxed, has a classical labour market, faces high credit constraints in financing investment and is less visible in terms of observed output. We compare outcomes under welfare- optimal monetary policy, discretion and welfare-optimized interest-rate Taylor rules alongside a balanced-budget fiscal regime. We compare the model, first with no frictions in these two markets, then with frictions in only the formal labour market and finally with frictions on both credit markets and the formal labour market. Our main conclusions are first, labour and financial market frictions, the latter assumed to be stronger in the informal sector, cause the time-inconsistency problem to worsen. The importance of commitment therefore increases in economies characterized by a large informal sector with the features we have highlighted. Simple implementable optimized rules that respond only to observed aggregate inflation and formal-sector output can be significantly worse in welfare terms than their optimal counterpart, but are still far better than discretion. Simple rules that respond, if possible, to the risk premium in the formal sector result in a significant welfare improvement. |
| Keywords: | Informal economy ; Emerging economies ; Labour market ; Credit market ; Tax policy ; Interest rate rules |
| JEL: | J65 E24 E26 E32 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/97&r=iue |
| By: | Batini, Nicoletta (IMF and University of Surrey); Kim, Young-Bae (University of Surrey); Levine, Paul (University of Surrey); Lotti, Emanuela (University of Surrey) |
| Abstract: | This paper reviews the literature on the informal economy, focusing first on empirical findings and then on existing approaches to modelling informality within both partial and general equilibrium environments. We concentrate on labour and credit markets, since these tend to be most affected by informality. The phenomenon is particularly important in emerging and other developing economies, given their high degrees of informal labour and financial services and the implications these have for the effectiveness of macroeconomic policy. We emphasize the need for dynamic general equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE) models for a full understanding of the costs, benefits and policy implications of informality. The survey shows that the literature on informality is quite patchy, and that there are several unexplored areas left for research. |
| Keywords: | Informal economy ; Labour market ; Search-matching models |
| JEL: | J65 E24 E26 E32 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/94&r=iue |
| By: | Andrés Fernández; Felipe Meza |
| Abstract: | Motivated by the fact that, over the business cycle, labor dynamics in emerging economies differ in nontrivial ways from those observed in developed economies, we assess the relative importance of trend shocks in emerging economies in the business cycle model of Aguiar and Gopinath (2007) when labor data is explicitly taken into account. We study Mexico and Canada as representatives of emerging and developed economies, respectively. We find for Mexico that, in the benchmark case with Cobb-Douglas preferences, the income effect on consumption of trend shocks is too strong, delivering countercyclical and counterfactual fluctuations in employment. The model faces a trade-off between, on the one hand, having sizeable growth shocks, thereby having a good match in terms of relatively high consumption volatility, and, on the other, having procyclical employment dynamics. This is remedied when both quasilinear preferences are assumed and the identification strategy explicitly takes into consideration labor dynamics. In this case trend shocks continue to be relatively stronger in emerging economies. Additionally, we find that differences in labor dynamics across emerging and developing economies are associated with the relatively large informal labor sector in emerging economies. It is in this dimension, when trying to match the dynamics of formal employment, that we find less evidence supporting an important role of trend shocks as being the main driving force of business cycles in emerging economies. |
| Date: | 2011–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:009249&r=iue |
| By: | Marcus Böhme, Rainer Thiele |
| Abstract: | Employing a unique dataset that covers almost 6000 informal enterprises from six West African urban centers, this paper examines the backward and forward linkages of these enterprises to the formal sector. We first provide a descriptive analysis of the existing formal-informal linkages. It turns out that formal backward linkages are much more prevalent than formal forward linkages, and that linkages vary with the degree of informality, occurring less frequently if firms have no ties to the formal sector at all or low capital stocks. In the second step, we employ a Probit approach to identify major factors associated with the observed backward linkages. The Probit analysis corroborates the importance of the degree of informality for the existence of linkages and shows various enterprise characteristics to be significant determinants as well. Finally, we analyze whether backward linkages matter for enterprise performance using both OLS and IV estimations. We find a positive and robust impact of backward linkages, whereas the degree of informality of the enterprises in our sample seems to affect firm performance only indirectly through their linkages to the formal sector |
| Keywords: | Informal sector, formal-informal linkages, enterprise performance, West Africa |
| JEL: | D22 D40 O17 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1751&r=iue |
| By: | Fabio Sánchez Torres; Oriana Alvarez Vos |
| Abstract: | Este documento tiene como objetivo contribuir al análisis de la problemática de la informalidad laboral en Colombia enfocándose principalmente en los costos mínimos de contratación formal como uno de los factores que más incide en su persistencia. Así mismo, se realizan recomendaciones de política y se examina la llamada ley del primer empleo a la luz de los indicadores de la informalidad laboral presentados. Para determinar los efectos de los costos mínimos de contratación sobre los indicadores del mercado laboral en Colombia se realizaron diversas simulaciones utilizando como año base 1992. Los resultados muestran que la informalidad hubiese sido menor sobre todo para aquellos trabajadores con menor escolaridad. En cuanto al tamaño de la firma, las simulaciones indican que el aumento de los costos mínimos de contratación formal ha contribuido a la exclusión de los trabajadores menos calificados de las firmas grandes. Debido a las altas tasas de informalidad laboral en Colombia, en el año 2010 se sancionó la ley del primer empleo que busca incentivar la formalización laboral en el país. Sin embargo, dadas las características de la informalidad la ley la ataca solo tímidamente. |
| Date: | 2011–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:009238&r=iue |
| By: | Erick CESPEDES RANGEL; Nestor GONZALEZ QUINTERO; Gustavo HERNÁNDEZ DIAZ; Gabriel PIRAQUIVE GALEANO |
| Abstract: | En este trabajo se presentan los resultados de la Matriz de Contabilidad Social para el año 2007, en la cual se involucra tanto actividades formales como informales. Para esto se toma como base las cuentas nacionales para el año 2007, con base 2000, y un conjunto de encuestas de hogares para los años 2007 al 2009, para evitar problemas de representatividad de los sectores, y la encuesta 123 del DANE para identificar las características de los empleos en los microestablecimientos de industria, comercio y servicios. Se presenta de manera resumida la metodología utilizada para la construcción de actividades formales e informales dentro de la MCS. Se encuentra que el 39.2% de los trabajadores colombianos contribuyen con tres cuartas partes del PIB, lo cual implica que la productividad del sector formal es 6.7 veces la del informal. |
| Date: | 2011–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000118:009229&r=iue |
| By: | Gabriel, Vasco (University of Surrey); Levine, Paul (University of Surrey); Pearlman, Joseph (London Metropolitan University); Yang, Bo (University of Surrey and London Metropolitan University) |
| Abstract: | We develop a closed-economy DSGE model of the Indian economy and estimate it by Bayesian Maximum Likelihood methods using Dynare. We build up in stages to a model with a number of features important for emerging economies in general and the Indian economy in particular: a large proportion of credit-constrained consumers, a financial accelerator facing domestic firms seeking to finance their investment, and an informal sector. The simulation properties of the estimated model are examined under a generalized inflation targeting Taylor-type interest rate rule with forward and backward-looking components. We find that, in terms of model posterior probabilities and standard moments criteria, inclusion of the above financial frictions and an infor- mal sector significantly improves the model fit. |
| Keywords: | Indian economy ; DSGE model ; Bayesian estimation ; Monetary interest rate rules ; Financial frictions |
| JEL: | E52 E37 E58 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:npf:wpaper:11/95&r=iue |