nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒05‒08
fourteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Self-Employment, Wage Employment and Informality in a Developing Economy By John Bennett; Matthew Rablen
  2. The government-taxpayer game By Carfì, David; Fici, Caterina
  3. Does Corporate Governance Reform Necessarily Boost Firm Performance? Recent Evidence from Russia By Kuznecovs, Mihails; Pal, Sarmistha
  4. The formal/informal employment earnings gap: evidence from Turkey By Tansel, Aysit; Kan, Elif Oznur
  5. Dualisme Migration et Chômage au Maroc By Jellal, Mohamed
  6. The demand for, and consequences of, formalization among informal firms in Sri Lanka By Suresh De Mel; David McKenzie; Christopher Woodruff
  7. Maroc salaire minimum emploi et pauvreté By Jellal , Mohamed
  8. Unemployment in Bolivia By Werner L. Hernani-Limarino; Maria Villegas; Ernesto Yanez
  9. The Determinants of Earnings Inequalities: Panel data evidence from South Africa By Andrew Kerr; Francis Teal
  10. Maroc éducation et emploi une analyse théorique By Jellal, Mohamed
  11. Financing the Start-up and Operation of Immigrant-owned Businesses: the path taken by African Immigrants in the Cape Town Metropolitan Area of South Africa. By Tengeh, Robertson Khan /RKT; Ballard, Harry / HB; Slabbert, Andre /AS
  12. Financial Consequences of Ill Health and Informal Coping Mechanisms in Indonesia By Robert Sparrow; Ellen Van de Poel; Gracia Hadiwidjaja; Athia Yumna; Nila Warda; Asep Suryahadi
  13. Certainty and Severity of Sanctions in Classical and Behavioral Models of Deterrence: A Survey By Entorf, Horst
  14. THE EFFECT OF MAFIA ON PUBLIC TRANSFERS By Guglielmo Barone; Gaia Narciso

  1. By: John Bennett; Matthew Rablen
    Abstract: We construct a simple model incorporating various urban labour market phenomena obtaining in developing economies. Our initial formulation assumes an integrated labour market and allows for entrepreneurship, self-employment and wage employment. We then introduce labour market segmentation. In equilibrium voluntary and involuntary sel-employment, formal and informal wage employment, and formal and informal and informal entrepreneurship may all coexist. We illustrate the model by an example calibrated on Latin American data, examining individual labour market transitions and implications of education/training and labour market policies. To diminish informality, cutting the costs of formality is more effective than raising those of informality.
    Date: 2012–03
  2. By: Carfì, David; Fici, Caterina
    Abstract: In this paper, we model - quantitatively – a possible realistic interaction between a tax-payer and his Government. We formalize, in a general setting, this strategic interaction. Moreover, we analyze "completely" a particular realistic sample of the general model. We determine the entire payoff space of the sample game; we find the unique Nash equilibrium of the interaction; we determine the payoff Pareto maximal boundary, conservative payoff zone and the conservative core of the game (part of Pareto boundary greater than the conservative payoff vector). Finally, we suggest possible compromise solutions between the two players. From an economic point of view, the sample chosen gives an example of normative settings, for which there is no reason (convenience), for the tax-payer, to evade the taxes or to declare less than his real income. Moreover, the two proposed compromise solutions (which realize the maximum collective gain) could be significantly applied to distinguished tax-payer (big companies and so on).
    Keywords: Government; taxpayer; tax; fiscal policy; tax evasion
    JEL: E62 H21 E42 G38 G18 G28 H26
    Date: 2012
  3. By: Kuznecovs, Mihails (University of Surrey); Pal, Sarmistha (University of Surrey)
    Abstract: This paper examines whether the introduction of corporate governance (CG) reforms in general and that of transparency and disclosure (T&D) rules in particular can necessarily boost firm performance. Existing literature suggests that CG reforms can boost performance because it can resolve the conflict of interest between the controlling and the minority owners, especially in societies with highly skewed distribution of ownership. We however argue that the success of CG reform would, in addition, depend on whether the reforms may initiate further conflict, e.g., that between the state and the controlling owners. Using recent data from Russia for 2000-2008, we find that the introduction of corporate governance codes in Russia had limited success to improve indices of firm performance in our sample. We argue that this arises from the predatory behavior of the central and local governments: greater transparency make businesses easy targets for aggressive tax enforcement policy by the central government while the decentralized local governments may increase the bribe price to protect businesses from high central taxes, which may also induce some businesses to go underground, thus harming firm performance.
    Keywords: corporate governance reform, transparency and disclosure rules, conflict between state and the controlling owner, taxation and fiscal decentralisation, firm performance, predatory state, Tobin's Q, Russia
    JEL: G3 K2 P2
    Date: 2012–04
  4. By: Tansel, Aysit; Kan, Elif Oznur
    Abstract: In this study, we examine the formal/informal sector earnings differentials in the Turkish labor market using detailed econometric methodologies and a novel panel data set drawn from the 2006-2009 Income and Living Conditions Survey (SILC). In particular, we test if there is evidence of traditional segmented labor markets theory which postulates that informal workers are typically subject to lower remuneration than similar workers in the formal sector. Estimation of standard Mincer earnings equations at the mean using OLS on a pooled sample of workers confirms the existence of an informal penalty, but also shows that almost half of this penalty can be explained by observable variables. Along wage/self-employment divide, our results are in line with the traditional theory that formal-salaried workers are paid significantly higher than their informal counterparts. Confirming the heterogeneity within informal employment, we find that self-employed are often subject to lower remuneration compared to those who are salaried. Moreover, using quantile regression estimations, we show that pay differentials are not uniform along the earnings distribution. More specifically, we find that informal penalty decreases with the earnings level, implying a heterogeneous informal sector with upper-tier jobs carrying a significant premium and lower-tier jobs being largely penalized. Finally, fixed effects estimation of the earnings gap depict that unobserved individual fixed effects when combined with controls for observable individual and employment characteristics explain the pay differentials between formal and informal employment entirely, thereby implying that formal/informal segmentation may not be a stylized fact of the Turkish labor market as previously thought.
    Keywords: Earnings gap; formal/informal employment; labor market dynamics; panel data; Turkey
    JEL: J40 J31 O17 J21
    Date: 2012–05–01
  5. By: Jellal, Mohamed
    Abstract: This paper considers the formation of the urban formal ector wages in the presence of rural migration in a collective bargaining framework. We show in particular that the restoration of full employment in the presence of an informal sector can be implemented through a policy of subsidy depends on the preferences of the union and its bargaining power wage. It also depends on the level of rural sector development.
    Keywords: Migration; Informal sector; Formal sector; Collective bargaining ; Unemployment;Policies ;Morocco
    JEL: O17 J51 J61 R23
    Date: 2012
  6. By: Suresh De Mel; David McKenzie; Christopher Woodruff
    Abstract: We conduct a field experiment in Sri Lanka providing informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs has no effect. Payments equivalent to one-half to one month (alternatively, 2 months) of the median firm’s profits leads to registration of around one-fifth (alternatively, one-half) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms which grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state.
    JEL: O14 O17
    Date: 2012–04
  7. By: Jellal , Mohamed
    Abstract: We argue that to a better understanding of the causes of unemployment in Morocco, it seems very important to study endogenously the consequences of the interaction between the structure of the labor market and the presence of the minimum wage. Indeed, it was argued that unemployment in Morocco can be caused by the existence of monopsony power of firms offering jobs that do not seem quite decent to workers and this may also explain the large size of the informal sector. It is this fact which justifies the establishment of an appropriate policy in the minimum wage and study its impact on employment in Morocco. This is our current research agenda.
    Keywords: Minimum wage law; employment; poverty
    JEL: J3 K31 J23 J42
    Date: 2012
  8. By: Werner L. Hernani-Limarino (Fundación ARU); Maria Villegas (Fundación ARU); Ernesto Yanez (Fundación ARU)
    Abstract: This paper attempts to evaluate the effectiveness of Bolivia’s labor market institutions, particularly the Plan Nacional de Empleo de Emergencia (PLANE). It is found that unemployment as conventionally defined may not be the most important problem in Bolivia’s labor market, as the non-salaried market is always an alternative. While un-employment durations and unemployment scarring consequences are relatively low, labor market regulations and labor market programs do not help to increase the size of the formal market, apparently as a result of Bolivia’s rigid labor markets and labor policies based mainly on temporary employment programs. Such programs, however, may have helped to smooth consumption. Given the country’s high level of infor-mality, protection policies are second best to active policies specifically designed to increase the productivity/employability of vulnerable populations.
    Keywords: Bolivia, Unemployment, Labor Policies, Impact Evaluation.
    JEL: J08 J21 J64
    Date: 2011–12
  9. By: Andrew Kerr; Francis Teal
    Abstract: In this paper we analyse the relative importance of individual ability and labour market institutions, including public sector wage setting and trade unions, in determining earnings differences across different types of employment. To do this we use the KwaZulu-Natal Income Dynamics Study data from South Africa, which show extremely large average earnings differentials across different types of employment. Our results suggest that human capital and individual ability explain much of the earnings differentials within the private sector, including the union premium, but cannot explain the large premiums for public sector workers. We show that a public sector premium exists only for those moving into the public sector. The paper addresses the challenges of non-random attrition and measurement error bias that panel data bring. Our results show that emphasising a simple binary dichotomy between the formal and informal sector can be unhelpful in attempting to explore how the labour market functions.
    Keywords: Formality; Trade unions; Public sector; Earnings; South Africa
    JEL: J31 J51 J45 O12
    Date: 2012
  10. By: Jellal, Mohamed
    Abstract: In this paper, we consider a theoritical model helping to provide a new insights into the functioning of moroccan labor market. The model examines the impact of imperfect competition among firms with access to specific technologies on the emergence of the new modern economy.The The emergence of this economy is characterized by the size of the employment of workers accepting wage for the specific training needed as well as the firms incentive to invest in new technologies given the competitive structure of the labor market and the product produced and exported under uncertain demand. Indeed it is assumed that each of these firms try to attract workers who are the best match for them ie the best trained and who bear the full cost of training is required for the job offered. Both the long term equilibrium wage offered and population distribution are determined. The structure of this new economy depends on both individual incentives as well as those established by public authorities.
    Keywords: Formal sector; Education ;Job matching; wages competition
    JEL: O17 J31 I21 J24 J23
    Date: 2012
  11. By: Tengeh, Robertson Khan /RKT; Ballard, Harry / HB; Slabbert, Andre /AS
    Abstract: Drawing a sample of 135 successful African immigrant-owned businesses, this paper sets out to investigate how their owners acquired the necessary capital for start-up and growth thereafter. The paper was designed within the quantitative and qualitative research paradigms, in which a triangulation of three methods was utilised to collect and analyse the data. The paper revealed that although African immigrants are characteristically at the disadvantage when it comes to accessing capital from formal financial institutions, this does not stop them from pursuing entrepreneurial activities. At the start-up stage, they typically resort to personal savings, business credit, family credit, and loans from informal financial institutions. According to the ability to raise capital, we found that a varying range of start-up capital was utilised, which tended to vary across the different ethnic groups studied. Once started, we found that the sources of additional finance available to these immigrants did not change significantly. They conventionally turned to friends, co-ethnics and self-help financial associations to ‘feed’ their need for further funding.
    Keywords: business start-up; immigrant-owned businesses; African immigrants; finance; capital; and South Africa
    JEL: M1 A10 M13
    Date: 2011
  12. By: Robert Sparrow; Ellen Van de Poel; Gracia Hadiwidjaja; Athia Yumna; Nila Warda; Asep Suryahadi
    Abstract: We assess the financial risk of ill health for households in Indonesia, the role of informal coping strategies, and the effectiveness of these strategies in smoothing consumption. Based on household panel data, we find evidence of financial risk from illness through medical expenses, while income from informal wage labour is exposed to risk for the poor and income from self-employed business activities for the non-poor. However, this lead to imperfect consumption smoothing only for the rural population and the poorest quartile; the non-poor seem to be able to maintain current spending. Borrowing and drawing on buffers, such as savings and assets, seem to be key informal coping strategies for the poor, which infers potential negative long term effects. While these results suggest scope for public intervention, the financial risk from income loss for the rural poor is beyond public health care financing reforms. Rather, formal sector employment, which reduces income risks, seems to be a key instrument for financial protection from illness.
    Keywords: Illness, income, consumption smoothing, coping strategies, Indonesia
    JEL: O15 I15
    Date: 2012
  13. By: Entorf, Horst (Goethe University Frankfurt)
    Abstract: This survey summarizes the classical fundamentals of modern deterrence theory, covers major theoretical and empirical findings on the impact of certainty and severity of punishment (and the interplay thereof) as well as underlying methodological problems, gives an overview of limitations and extensions motivated by recent findings of behavioral economics and discusses 'rational' deterrence strategies in subcultural societies.
    Keywords: economics of crime, behavioral economics, deterrence, survey
    JEL: K4 H0
    Date: 2012–04
  14. By: Guglielmo Barone (Bank of Italy, Economic Research Department, Branch of Bologna, Piazza Cavour 6, 40124, Bologna, Italy); Gaia Narciso (Trinity College Dublin, CReAM and IIIS, Department of Economics, 3012 Arts Building, Dublin 2, Ireland)
    Abstract: This paper analyzes the impact of organized crime on the allocation of public transfers. We assemble an innovative data set on Italian mafia and public funds to businesses at municipality level and instrument current mafia activity with rainfall in the XIX century and geographical shifters of land productivity. We show that organized crime greatly increases the amount of public funds to businesses. Mafia is also found to lead to episodes of corruption in the public administration sector. Our results suggest that the design of geographically targeted aid policies should take into account local crime conditions.
    Keywords: organized crime, public transfers, corruption
    JEL: H4 K4 O17
    Date: 2012–04

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