nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒04‒03
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Shadow Economy and Work in the Shadow: What Do We (Not) Know? By Schneider, Friedrich
  2. Cash, Hoarding and the Underground Economy By Michael Pickhardt; Jordi Sardà
  3. Labor, Output and COnsumption in Business Cycle Models of Emerging Economies: A Comment By Andres Fernandez; Felipe Meza
  4. Financing Social Expenditures in Developing Countries: Payroll or Value Added Taxes? By Richard M. Bird; Michael Smart
  5. The Impact of Colombia's Pension and Health Insurance Systems on Informality By Calderón-Mejía, Valentina; Marinescu, Ioana E.
  6. Nice guys finish last: are people with higher tax morale taxed more heavily? By Philipp Doerrenberg; Denvil Duncon; Clemens Fuest; Andreas Peichl
  8. Spending More is Spending Less: Policy Dilemmas on Irregular Migration By Alessandra Casaric; Giovanni Facchini; Tommaso Frattini

  1. By: Schneider, Friedrich (University of Linz)
    Abstract: In this paper the main focus lies on the shadow economy and on work in the shadow in OECD, developing and transition countries. Besides informal employment in the rural and non-rural sector also other measures of informal employment like the share of employees not covered by social security, own account workers or unpaid family workers are shown. The most influential factors on the shadow economy and/or shadow labor force are tax policies and state regulation, which, if they rise, increase both. Furthermore the discussion of the recent micro studies underline that economic opportunities, the overall burden of the state (taxes and regulations), the general situation on the labor market, and unemployment are crucial for an understanding of the dynamics of the shadow economy and especially the shadow labor force.
    Keywords: shadow economy, undeclared work, shadow labor force, tax morale, tax pressure, state regulation, labor market
    JEL: K42 H26 D78
    Date: 2012–03
  2. By: Michael Pickhardt; Jordi Sardà
    Abstract: We further refine the Modified-Cash-Deposits-Ratio (MCDR) approach, developed by Pickhardt and Sardà (2011, 2012) with a view to analyze size and causes of the cash using section of the underground economy. Among other things, we address the issue of cash hoarding. Findings include that the size of hoarded currency in Germany, about 40 to 110 billion Euro in 2009 according to recent estimates, may have reduced the size of the cash using underground economy in Germany, ceteris paribus, from about 8.5 to 2 percent in 2009, according to the MCDR approach.
    Keywords: underground economy, shadow economy, hoarding, cash demand
    JEL: O17 H26
  3. By: Andres Fernandez (Universidad de los Andes); Felipe Meza (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    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
  4. By: Richard M. Bird (University of Toronto); Michael Smart (University of Toronto)
    Abstract: At present most social protection programs in Latin American countries are financed by payroll taxes levied on the formal sector. Increasingly, some countries are both extending some benefits similar to those received from these programs to non-contributors and financing such extensions as well as some benefits for contributors from general revenues, which at the margin in most countries means from the value added tax. In this paper we consider the efficiency of payroll taxes compared to value-added taxes as a way of financing expanded social programs in countries with large informal sectors. To do so, we construct a simple formal model that indicates, in general, that a revenue-neutral move from payroll to value-added taxes will reduce informality and increase wages, output and welfare. While the issue is not a simple one, and the specific conditions in each country need careful consideration, this analysis suggests that in countries with large informal sectors it is probably best to finance incremental expansions of social programs from broad-based taxes like VAT instead of payroll taxes.
    Date: 2012–01–13
  5. By: Calderón-Mejía, Valentina (University of Chicago); Marinescu, Ioana E. (Harris School, University of Chicago)
    Abstract: Social protection systems in developing countries are typically composed of a bundle of benefits, the major ones being health insurance and pensions. Benefit bundling may increase informality and decrease welfare. Indeed, if some of the benefits are valued at substantially less than their cost, workers may choose to forego all benefits, even though some other benefits are valued at or above their cost. We examine the impact of benefit bundling using a series of Colombian reforms. The key reform is the unification of the payment systems for health and pension, which made it more difficult to contribute differently to the one plan versus the other. Using the progressive roll-out of the unified payment system by firm size, we show that benefit bundling increases both full formality and full informality by about 1 percentage point. The increase in full formality is concentrated among salaried workers in small to medium firms, while the increase in full informality is concentrated among independent workers.
    Keywords: informal sector, pensions, health insurance, social protection, Colombia
    JEL: I11 I18 O17
    Date: 2012–03
  6. By: Philipp Doerrenberg (CGS, University of Cologne); Denvil Duncon (Indiana University); Clemens Fuest (University of Oxford); Andreas Peichl (IZA, University of Cologne, ISER and CESifo)
    Abstract: This paper is the first to provide evidence of efficient taxation of groups with heterogeneous levels of 'tax morale'. We set up an optimal income tax model where high tax morale implies a high subjective cost of evading taxes. The model predicts that 'nice guys finish last': groups with higher tax morale will be taxed more heavily, simply because taxing them is less costly. Based on unique cross-country micro data and an IV approach to rule out reverse causality, we find empirical support for this hypothesis. Income groups with high tax morale systematically face higher average and marginal tax rates. To the best of our knowledge, this is the first paper to investigate whether differences in tax morale affect the distribution of the tax burden across different groups of taxpayers.
    Keywords: tax morale, tax compliance, optimal taxation, political economy
    JEL: H2 H3 D7
    Date: 2012–01–06
  7. By: Idawati Ibrahim Author_Email: (College of Business, Universiti Utara Malaysia,Sintok,Kedah,Malaysia); Jeff Pope (School of Economics and Finance, Curtin University,Perth,Western Australia,Australia)
    Keywords: Compliance costs, electronic filing, personal income tax, Malaysia.
    JEL: M0
    Date: 2011–06
  8. By: Alessandra Casaric (Bocconi University, CES-Ifo, Econpubblica and Centro Studi Luca d\'Agliano); Giovanni Facchini (Erasmus University Rotterdam, University of Milan, CEPR, CES-Ifo,CReAM, IZA, and LdA); Tommaso Frattini (University of Milan, CReAM, IZA and Centro Studi Luca d’Agliano)
    Abstract: We study the migration policy set by a welfare maximizing government in a model where immigrant workers differ in their skills and are imperfectly matched with heterogenous occupations. The policy fixes a minimum skill level for legal migrants, and foreign workers that fall below it can only enter the country illegally. We start by analyzing under which conditions an amnesty is desirable compared to tolerating undocumented immigrants. Next, we study when it is preferable to have ex-ante lax enforcement, rather than to carry out costly enforcement. We show that three channels play an important role in this decision: an amnesty is more likely the larger are the output gains brought about by the legalization, the less redistributive is the welfare state and the higher is the expected cost of criminal activities carried out by illegal immigrants. Importantly, we also find that, when an amnesty is desirable, the destination country would reach an even higher welfare level investing in enforcement ex-ante. Empirical evidence based on a novel panel dataset of legalization programs carried out by a group of OECD countries between 1980-2007 broadly supports the role played by the channels identified in our theoretical model.
    Keywords: Illegal immigration, Immigration Policy, Amnesties, Labor Market Mismatch
    JEL: F22 J61
    Date: 2012–03–27

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