nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2012‒07‒14
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Sectorial shifts and Inequality. How to relate macroeconomic events to inequality changes By Carlos Villalobos Barría
  2. The indirect effects of auditing taxpayers. By Ratto, Marisa; Thomas, Richard; Ulph, David
  3. Informalidad y dualismo en la economía mexicana By Alicia Puyana; Jose Romero
  4. Universal health care and informal labor markets : the case of Thailand By Wagstaff, Adam; Manachotphong, Wanwiphang
  5. Credit, Labor Informality and Firm Performance in Colombia By Lorena Caro; Arturo Galindo; Marcela Melendez
  6. Constraints to the Growth of Small Firms in Northern Myanmar By Bah, El-hadj M.; Cooper, Geoff
  7. Tax Bunching, Income Shifting and Self-employment By Daniel le Maire; Bertel Schjerningo
  8. A common corporate tax base for Europe: An impact assessment of the draft council directive on a CC(C)TB By Spengel, Christoph; Ortmann-Babel, Martina; Zinn, Benedikt; Matenaer, Sebastian
  9. Corporate Social Responsibility: Transparency, Ethics and Governance in Emerging Markets By Stephanie Jones; Taghreed Badawoud; Mohammad Reza

  1. By: Carlos Villalobos Barría (Georg-August-Universität Göttingen)
    Abstract: This paper presents a way to explore how macroeconomic shifts cause inequality changes. It is based on the backwardness observed in the agricultural sector in rural areas. It shows why highly dualistic economies tend to be more unequal than economies with flexible and integrated labour markets. Assuming that an inter-sectorial wage gap exists, this methodology allows control over the direct impact on inequality changes caused by macroeconomic changes that affects the relative competitiveness between the tradable and non-tradable sectors. The methodology aims to find the wage gap change (in log units) taking place between two points in time, which is not dependent on the distribution of endowments of the employed population (observed and unobserved characteristics). The decomposition methodology here proposed shows to be consistent under few assumptions (log normal distribution of earnings and inter-sectorial stochastic dominance) and was tested using real and simulated data. The procedure supports the conclusions by Devillanova et al. (2010) suggesting a channel through which trade integration can affect the wage inequality in a context of capital-skill complementarity and imperfect mobility of workers. The main conclusion of this paper is that duality is a source of inequality. Therefore, policies oriented to eliminate the systematic backwardness appear to be highly desirable in such economies.
    Keywords: Inequality, Decomposition,Wage-gap, Tradable and Non-tradable sectors, Micro-econometric Simulations
    JEL: D63 C15
    Date: 2012–06–21
  2. By: Ratto, Marisa; Thomas, Richard; Ulph, David
    Abstract: In this paper we focus on the effects of investigations on tax compliance. Results from empirical studies suggest that the effects of audits are not only in terms of recovered unpaid tax (direct effects), but there are also indirect effects in terms of future better compliance in the rest of the community. The evidence suggests that such indirect effects tend to outweigh the direct effect. However, current policy decisions of how to allocate investigation resources across different groups of taxpayers generally neglect the indirect effects, generating a potential resource misallocation issue. With the aim to clarify a possible mechanism through which the indirect effects work and hence to inform any policy recommendations, we model tax compliance as a social norm and decompose the total effect of an increase in the audit probability into a direct effect (increased expected fine) and a multiplier effect due to taxpayers’ interdependencies.
    Keywords: optimal audit rule; tax evasion; social norm; opportunities to evade;
    JEL: D81 H26 H30 K42
    Date: 2012
  3. By: Alicia Puyana (FLACSO); Jose Romero (El Colegio de México)
    Abstract: This paper analyzes the trajectory of informality as it has evolved since 1950. For doing so, the analytic frame elaborated by Arthur Lewis was applied. For Lewis, the informal employment results from the incapacity of an economy, with unlimited labour supply, to absorb all the working force at a given equilibrium salary. Therefore, in this essay, informality represents the residual labour that remains stacked in the non-modern sector, once the modern sector has absorbed all the labour it can employed at a given equilibrium wage and available capital. The analysis starts with a mathematical formalization of the Lewis model and proceeds to evaluate one of its main conclusions using observed data of the Mexican economy. The model accurately represents the stylized facts of the economy and allows concluding that, after the introduction of the structural reforms, the modern sector of the Mexican economy experienced a large increase in capital intensity which enlarged its capital/labour ratio and inflated the costs of generating formal employment. In these conditions, and taking into consideration the meagre investments registered during the last two decades it is not surprising the immovability of the share of formal in total employment as well as the almost negligible increases in total labour productivity and total income per head.
    Keywords: employment, informality, dualism, productivity
    JEL: J0 J4 O4 O5
    Date: 2012–05
  4. By: Wagstaff, Adam; Manachotphong, Wanwiphang
    Abstract: This paper explores the possibility that universal health coverage may inadvertently result in distorted labor market choices, with workers preferring informal employment over formal employment, leading to negative effects on investment and growth, as well as reduced protection against non-health risks and the income risks associated with ill health. It explores this hypothesis in the context of the Thai universal coverage scheme, which was rolled out in four waves over a 12-month period starting in April 2001. It identifies the effects of universal coverage through the staggered rollout, and gains statistical power by using no less than 68 consecutive labor force surveys, each containing an average of 62,000 respondents. The analysis finds that universal coverage appears to have encouraged employment especially among married women, to have reduced formal-sector employment among married men but not among other groups, and to have increased informal-sector employment especially among married women. The largest positive informal-sector employment effects are found in the agricultural sector.
    Keywords: Health Monitoring&Evaluation,Labor Markets,Population Policies,Labor Policies,Access to Finance
    Date: 2012–07–01
  5. By: Lorena Caro; Arturo Galindo; Marcela Melendez
    Abstract: This paper explores the links between labor formality, access to credit and firm performance in Colombia using Annual Manufacturing Survey data for the period 2000-2009. A significant though small relationship is found between access to credit and informality. The results suggest that a 10 percent increase in the ratio of credit to sectoral output increases labor formality between 0. 76 and 1. 14 percentage points. This effect vanishes as a firm’s financial constraint increases. The paper also reports a strong correlation between labor formality and firm performance measured as output and employment growth. A one percentage point increase in labor formality is associated with an 8. 5 percent increase in output and an 11 percent increase in employment growth.
    JEL: E26 G21 O16 O4
    Date: 2012–06
  6. By: Bah, El-hadj M.; Cooper, Geoff
    Abstract: This paper uses survey data collected from Kalaymyo, a small urban city in North West Myanmar, to characterize firms and analyze the constraints limiting their growth. The level of firm ownership is very high but most firms are small, informal, operated out of the home, earning low income and with no employees. The most binding constraints are related to financing constraints, especially lack of access to informal credit. This is followed by the high degree of competition as the majority of firms are small retailers selling non-differentiated goods. This lack of credit combined with an apparent aversion to debt, limits the ability of entrepreneurs to take advantage of the high returns available on investment. We find that firms that made a capital investment over the last three years are significantly more profitable than those that did not.
    Keywords: rural investment climate; enterprize development; poverty reduction; Myanmar
    JEL: O53 O10 L20
    Date: 2012–06
  7. By: Daniel le Maire (Department of Economics, University og Copenhagen); Bertel Schjerningo (Department of Economics, University og Copenhagen)
    Abstract: This paper proposes a dynamic extension to Saez (2010) bunching formula that allows us to distinguish bunching based on real responses and income shifting. We provide direct evidence of income shifting and pronounced bunching in taxable income for the case of Danish self-employed. If income shifting was neglected in this case, we would conclude that taxable incomes were highly sensitive to changes in marginal tax rates. We show, however, that more than half of the observed bunching in taxable income for the self-employed is driven by intertemporal income shifting, implying a structural elasticity in the range of 0.14-0.20
    Keywords: Self-employment, tax bunching, retained pro?ts, tax avoidance, income shifting
    JEL: H20 J20
    Date: 2012–05
  8. By: Spengel, Christoph; Ortmann-Babel, Martina; Zinn, Benedikt; Matenaer, Sebastian
    Abstract: After intensive and extensive preparation, the European Commission released the long-awaited proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) on March 16, 2011. In the context of the Europe 2020 Strategy, major objectives of the proposed CCCTB are the elimination of transfer pricing concerns, the removal of double taxation due to conflicting tax claims between Member States and, ofcourse, the reduction of tax compliance costs. However, as the second and the third step of the proposed CCCTB, i.e. the consolidation and the allocation mechanism, still suffer from considerable shortcomings, we recommend introducing the CCCTB in two steps. In this context, our paper focuses on the first step of a CCCTB, i.e. the common corporate tax base (CCTB). The paper combines qualitative and quantitative analyses on the key differences and similarities between the proposed CCTB and current tax accounting practice in all 27 Member States, Switzerland and the U.S. It offers not only a broad geographical scope, but also great detail in analyzing the differences in tax accounting and quantifying the change in tax burden induced by the introduction of a CCTB in each Member State, Switzerland and the U.S. --
    Keywords: CCCTB,Corporate Taxation,Effective Tax Burden,European Tax Analyzer
    JEL: H20 H25
    Date: 2012
  9. By: Stephanie Jones (Maastricht School of Management, Maastricht, The Netherlands); Taghreed Badawoud (Maastricht School of Management, Maastricht, The Netherlands); Mohammad Reza (Maastricht School of Management, Maastricht, The Netherlands)
    Abstract: In managing business in emerging markets, Corporate Social Responsibility [CSR] is an issue of growing worldwide concern. It adds to the complexity of the management task in this environment, contributing to risks faced in all business transactions – although it may not be seen in this precise terminology. Indeed, the concepts of CSR, Business Ethics and Corporate Governance – as discussed by Western governments, donor agencies and MBA students, for example – may be almost unknown in some of the countries where they pose a major problem. The way that businesses in emerging markets cope with these challenges – both effectively and ineffectively – reveal many of the “new dynamics of management” discussed in this conference. The damage caused by the many corporate scandals in the West – Watergate, Enron, WorldCom in the USA, Rupert Murdoch and News International, parliamentary expenses in the UK – has been well-publicised, and in many cases perpetrators are brought to justice. Corporate governance and transparency issues have increasingly moved to centre-stage. CSR abuses and business ethics transgressions in the BRICs and beyond may be more widespread and more tolerated, less obvious and more part of the ‘normal’ business scene – although the situation is impossible to quantify, especially within local regulatory frameworks and where there are few active and independent journalists. This situation may be changing, with globalisation and greater scrutiny of governance matters by investors... yet CSR issues remain one of the greatest concerns and major risks for the Western business person involved in globalizing their operations. Businesses from some Western countries such as the USA are particularly anxious to avoid prosecution at home when tempted to be more flexible in the BRICs and beyond, due to the Foreign Corrupt Practices Act and other legislation. Which particular CSR issues are of most interest and importance for Western executives trying to avoid compromise and possible business loss? Corruption, the abuse of human rights, a lack of data protection, financial fraud, copyright piracy, low levels of transparency and high levels of anonymity, workplace discrimination, oppressive economic colonization, an absence of fair competition, poor levels of corporate governance, no respect for intellectual property, the perpetration of monopolies and the tolerance of leaders of dubious accountability and respectability. The list is endless, and can include local practices unknown to the Western executive – although he or she will have their own personal experiences after first-hand exposure. Many relate to institutional voids – a lack of the kind of business infrastructure of which Westerners are usually familiar and expect. Corruption may be seen as one of the most important issues, and may be a way of life in countries with low salaries but powerful officials – and greedy business people. Human rights abuse is an ongoing issue, and is seen as especially negative by individualistic and freedom-enjoying Westerners, with their insistence on privacy and data protection issues. Financial scandals and fraud have been sending shock waves throughout the BRICs and beyond, with billions of dollars simply going missing. Copyright piracy is not unknown in the West, but the scale in some BRICs and beyond can be alarming, together with the issue of transparency and ease of doing business in entering several emerging economies, often related to governance. Prospects of equal opportunities for members of different races are an important issue for countries with a mixed population, such as South Africa – but it would seem that discrimination is still the norm. Economic dominance by some Western countries – and China – in many emerging countries is seen as an example of the economic colonization of one country by another, raising several CSR issues, including protection or the matter of unfairly excluding competition. The concept of corporate governance used to be a preserve of the West, but is gradually impacting developing countries, especially those trying to attract foreign investment, and is especially concerned with ensuring independent management control. Intellectual property or IP is another concern, and so are state-endorsed monopolies.
    Date: 2012–07

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