nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒07‒08
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Underground labor, search frictions and macroeconomic fluctuations By Giuseppe Ciccarone; Francesco Giuli; Enrico Marchetti
  2. The Friedman rule in a model with nonlinear taxation and income misreporting By Gahvari, Firouz; Micheletto, Luca
  3. On the role of backauditing for tax evasion in an agent-based Econophysics model By G. Seibold; M. Pickhardt
  4. Currency devaluation with dual labor market : Which perspectives for the Euro Zone ? By Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
  5. The Mexican Wage Curve 2000-2003: A Quantile Analysis By Hector Elias Gutierrez Rufrancos
  6. India’s structural transformation and role in the world economy By Codrina Rada and Rüdiger von Arnim
  7. Promoting Social Cohesion in Korea By Randall S. Jones; Satoshi Urasawa

  1. By: Giuseppe Ciccarone; Francesco Giuli; Enrico Marchetti
    Abstract: We study the e¤ects of underground activities on labour market dynamics in a RBC model with search frictions in the labor market, bargained wage and quadratic hiring costs. Underground activities, which allow agents to (partially) evade taxes, are modelled through a moonlighting production scheme where both regular and underground labor use the same capital equipment inside the firm. Calibrating the model on the U.S. economy, we show that a higher relative size of underground production implies lower average employment and a lower job finding rate, together with higher volatility of employment and lower volatilities of hours worked and wages of regular labor services. The theoretical explanation we provide is that a higher level of the underground activity increases the ratio of the flow contribution of non-working to the flow contribution of a worker to a labour match.
    Keywords: underground activities, tax evasion, search and matching, real business cycle
    JEL: E32 E26 J64
    Date: 2012–06
  2. By: Gahvari, Firouz (Department of Economics); Micheletto, Luca (Uppsala Center for Fiscal Studies)
    Abstract: This paper develops an overlapping-generations model with money-in-the-utilityfunction and heterogeneous agents in terms of earning ability. It shows that in the presence of income misreporting the Friedman rule is in general violated. The result holds even though the government taxes reported incomes nonlinearly and agents have preferences that are separable between labor supply and other goods including real money balances.
    Keywords: Monetary policy; scal policy; redistribution; Friedman rule; income misreporting; overlapping generations; second best
    JEL: E52 H21
    Date: 2012–06–27
  3. By: G. Seibold; M. Pickhardt
    Abstract: We investigate an inhomogeneous Ising model in the context of tax evasion dynamics where different types of agents are parametrized via local temperatures and magnetic fields. In particular, we analyse the impact of backauditing and endogenously determined penalty rates on tax compliance. Both features contribute to a microfoundation of agent-based econophysics models of tax evasion.
    Date: 2012–06
  4. By: Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
    Abstract: In this paper, we assume a world of two countries in a fixed exchange rate system. The main difference between the two countries lies in the features of their labor markets. In the home country, we assume the existence of a dual labor market, with formal and informal sectors. In the foreign country, the labor market is homogeneous and characterized by a nominal wage rigidity. In this context, the situation of labor market in each country is not optimal through a misallocation of workers between sectors in domestic economy, and unemployment in foreign economy. Our article shows that a devaluation of domestic currency implies a fall in production in each country, an increase in unemployment in foreign economy and a worse reallocation of workers by a growth of informal sector in domestic economy.
    Keywords: efficiency wage, dualism, exchange rate, devaluation.
    JEL: F16 F41 J31
    Date: 2012
  5. By: Hector Elias Gutierrez Rufrancos (Department of Economics, University of Sussex)
    Abstract: This paper exploits the Mexican Encuesta Nacional de Empleo Urbano (ENEU) to determine the existence of the wage curve|an empirical phenomena rst suggested by Blanch ower and Oswald (1990)|during the period 2000{2003. We propose an innovative approach to the wage curve by estimating the elasticity across the wage dis- tribution. This is applied to the Mexican experience during the early 2000s recession. The evidence indicates that for Mexico during this period there is no wage curve, and that wages are positively aected by local levels of unemployment. This lends credi- bility to the Harris and Todaro (1970) view which suggests that there is segmentation in the labour market with residual unemployment. We argue that perhaps the power of unions may account for our fndings.
    Keywords: Wage curve, unemployment, Formal/Informal Employment, Urban labour markets, Mexico
    JEL: C21 J30 J60 O17
    Date: 2012–06
  6. By: Codrina Rada and Rüdiger von Arnim
    Keywords: structural change; informal sector; India; global demand JEL Classification: O11, O17, O53, F01 This paper employs (1) a three-sector structuralist model of development with informal and formal activities and (2) a global one-sector model with demand determined outputs and bargained distribution to investigate whether India’s growth performance can be sustained, where the country might face constraints to growth, and how India’s growth matters in the global economy.
    Date: 2012
  7. By: Randall S. Jones; Satoshi Urasawa
    Abstract: Korea faces the challenge of reversing rising inequality while sustaining robust economic growth. Welltargeted increases in Korea’s low level of social spending are needed to fill holes in the safety net, especially for the elderly. The development of social security depends on closing gaps in coverage, which are due in part to labour market dualism. Dualism creates serious equity concerns, as non-regular workers face significantly lower wages, precarious jobs, less coverage by social security and less training. A comprehensive approach is required to break down dualism, including reduced employment protection for regular workers, improved social insurance coverage for non-regular workers and expanded training of non-regular workers. Education reforms are also needed to promote inclusive growth, notably by: i) improving the access of low-income children to high-quality early childhood education and care; ii) reducing reliance on private tutoring, notably at hagwons; and iii) expanding income-contingent loans to tertiary students.<P>Promouvoir la cohésion sociale en Corée<BR>La Corée doit s’attacher à inverser le creusement des inégalités tout en soutenant une croissance économique vigoureuse. Des hausses ciblées des dépenses sociales actuellement peu élevées de la Corée sont nécessaires pour combler les lacunes du filet de protection sociale, en particulier pour les personnes âgées. Pour développer la sécurité sociale, il faut combler les lacunes de la couverture, lesquelles résultent en partie du dualisme du marché du travail. Ce dualisme engendre de graves problèmes d’équité, car les travailleurs temporaires perçoivent des salaires nettement inférieurs, occupent des emplois précaires, bénéficient d’une couverture sociale plus limitée et d’un moindre accès à la formation. Il faut adopter une approche globale pour briser le dualisme, notamment en réduisant la protection de l’emploi pour les travailleurs réguliers, en améliorant la couverture sociale pour les travailleurs temporaires et en développant les formations offertes à ces travailleurs. Des réformes de l’éducation sont également requises pour promouvoir une croissance inclusive, notamment: i) en améliorant l’accès des enfants issus de milieux pauvres à des services d’éducation et d’accueil des jeunes enfants de qualité; ii) en réduisant le recours au tutorat privé, notamment aux hagwons; et iii) en accordant aux étudiants de l’enseignement supérieur davantage de prêts remboursables en fonction de leurs revenus futurs.
    Keywords: education, Korea, income inequality, relative poverty, social spending, labour market dualism, earned income tax credit, non-regular workers, Korean economy, childcare, services sector, Basic Livelihood Security Programme, Basic Old-Age Pension, ECEC, hagwons, student loans, Corée, travailleurs non réguliers, système éducatif, inégalité des revenus, pauvreté relative, dépenses sociales, dualisme du marché du travail, économie coréenne, Programme de garantie du minimum de subsistance, EAJE, hagwons, crédit d’impôt sur les revenus du travail
    JEL: D6 H5 I2 J3 O53
    Date: 2012–06–05

This nep-iue issue is ©2012 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.