nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2013‒12‒06
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Earnings inequality and informal Employment in Russia By Anna Lukiyanova
  2. Minimum wages and labor market outcomes: evidence from the emerging economy of Russia By Alexander Muravyev; Aleksey Oshchepkov
  3. Informal Jobs and Trade Liberalisation in Argentina By Montes-Rojas, G.; Acosta, P.
  4. Prospect Theory and Tax Evasion: A Reconsideration of the Yitzhaki Puzzle By Piolatto, Amedeo; Rablen, Matthew D.
  5. Fiscal illusion and the shadow economy: Two sides of the same coin? By Andreas Buehn; Roberto Dell'Anno; Friedrich Schneider
  6. The Impact of Tax Substitution on the price of pharmaceutical products in the state of São Paulo By André Luis Squarize Chagas
  7. Guest Workers in the Underground Economy By Djajic, S.; Mesnard, A.
  8. Informal loans in Russia: credit rationing or borrower’s choice? By Maria Semenova; Victoria Rodina
  9. Informalidade e Desempenho Econômico: Uma Análise dos Impactos Micro e Macroeconômicos de Políticas Para a Formalização By Gabriel Ulyssea

  1. By: Anna Lukiyanova (Senior Reseacher, Centre for Labor Market Studies, Higher School of Economics, Moscow.)
    Abstract: In this paper I investigate the impact of informality on earnings inequality in Russia using RLMS-HSE data for 2000-2010. I find that during the whole period earnings inequality was substantially higher in the informal sector. Informality increases earnings polarization, thereby widening both tails of the distribution. Changes in the earning distribution of the formal sector were mainly generated by changes in the distribution of hourly earnings. In the informal sector, reduction of inequality occurred via two channels: Differences in hourly rates and working hours both declined. Changes in the structure of informality and conditional wage differentials did not have a significant impact on the overall earnings inequality, with the exception of decline in irregular employment
    Keywords: earnings inequality, informal economy, decomposition, recentered influence functions
    JEL: C21 D63 J31 J42
    Date: 2013
  2. By: Alexander Muravyev (Institute for the Study of Labor (IZA, Bonn) and St. Petersburg University Graduate School of Management.); Aleksey Oshchepkov (Center for Labor Marker Studies, Higher School of Economics (HSE), Moscow.)
    Abstract: This paper revisits the effect of minimum wages on employment by taking advantage of a unique institutional setting and data from Russia. The main strength of the paper is the use, for identification purposes, of the large variation in labor market outcomes as well as in the minimum wage across the 89 regions (states) over 10 years, from 2001 to 2010. The study relies on the standard methodology introduced by Neumark and Wascher, in which various labor market outcomes at the regional level are related to the relative minimum wage (captured by the Kaitz index) in a panel setting. We find adverse effects of the minimum wage on young workers in the form of higher unemployment among those aged 16-24. There are also signs that minimum wage increases lead to higher unemployment in the general population, but the effect is small. Our analysis also suggests that higher minimum wages lead to an increase in the share of workers employed in the informal sector.
    Keywords: minimum wages, unemployment, informal employment, Russia.
    JEL: J38 J23
    Date: 2013
  3. By: Montes-Rojas, G.; Acosta, P.
    Abstract: Rapid trade liberalisation can exert profound effects on labour markets. Domestic firms, to sustain competitiveness for survival, could react through cutting labour benefits to achieve cost reductions. Alternatively, trade liberalisation may alter the industry composition of firms changing the aggregate formality rates. This paper studies the relationship between trade liberalisation and informality in Argentina. Using manufacturing industry-level data for 1992-2003, the results confirm the hypothesis that trade increases informality in industries that experience sudden foreign competition. This explains about a third of the increase in informality. Sectors with higher investment ratios are able to neutralize and reverse this effect.
    Keywords: informality; trade liberalization; Argentina
    Date: 2013
  4. By: Piolatto, Amedeo (Barcelona Institute of Economics); Rablen, Matthew D. (Brunel University)
    Abstract: The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in respect of the puzzle. Prospect theory fails to reverse the puzzle for various classes of endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude.
    Keywords: prospect theory, tax evasion, Yitzhaki puzzle, stigma, diminishing sensitivity, reference dependence, endogenous audit probability, endogenous reference level
    JEL: H26 D81 K42
    Date: 2013–11
  5. By: Andreas Buehn; Roberto Dell'Anno; Friedrich Schneider
    Abstract: This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal. Most importantly, we find that fiscal illusion negatively affects the shadow economy: Concealing the real tax burden through fiscal illusion potentially contributes to the government’s efforts to repress shadow economic activities.
    Keywords: Fiscal illusion; shadow economy; MIMIC model; latent variables, tax burden, tax complexity
    JEL: O17 K42 O54 N16
    Date: 2013–12
  6. By: André Luis Squarize Chagas
    Abstract: The mechanism of the Tax Subsitituion has been widely adopted by the Brazilian states in order to simplify tax colletion and combat evasion. Since mid-2007 the São Paulo State Treasury Office began adopting the tax substitution as means of receiving the ICMS due by the pharmaceutical sector. This work seeks to test the effects of the change in the form of taxation on consumer prices. For this, three alternative approaches are used to test the existence of structural break in the series of prices of pharmaceuticals in the state, and the relationship of co-integration of this series with the other states. The results suggest that, after the replacement tax, there was an increase of consumer prices.
    Keywords: tax substitution; tax incidence; co-integration; structural break
    JEL: C32 H22 I18
    Date: 2013–11–26
  7. By: Djajic, S.; Mesnard, A.
    Abstract: Guest-worker programs have been providing rapidly growing economies with millions of temporary foreign workers over the last couple of decades. With the duration of stay strictly limited by program rules in most of the host countries and wages paid to guest workers often set at sub-market levels, many of the migrants choose to overstay and seek employment in the underground economy. This paper develops a general-equilibrium model that relates the flow of guest workers transiting to the underground economy to the rules of the program, enforcement measures of the host country and market conditions facing migrants at home and abroad.
    Date: 2013
  8. By: Maria Semenova (National Research University Higher School of Economics. Center for Institutional Studies. Research fellow); Victoria Rodina (National Research University Higher School of Economics. Center for Institutional Studies. Research assistant)
    Abstract: This paper examines the strategies of Russian households for choosing either the formal or informal banking sector as a source of credit. We aim to learn why households refuse to become clients of a bank and prefer to instead raise funds by borrowing from individuals – friends, colleagues, relatives, and other private parties. We use the results of “Monitoring the Financial Behavior of the Population” (2009-2010), a national survey of Russian households. Our results suggest that a household’s choice of the informal credit market is based not only on economic factors, but also on some institutional ones, including financial literacy, trust in the banking sector, and credit discipline. We show that choosing the informal market is explained by a lack of financial literacy, measured by mathematical competence and home accounting, as well as by a lack of trust in the banking sector as a whole. Borrowers from private parties demonstrate a higher degree of credit discipline: those who believe that repaying a loan is not obligatory are less frequently among informal borrowers and they choose the bank credit market. Our findings, however, are still in line with credit rationing theory. We show that better financial conditions reduce a household’s probability to use both formal and informal credit markets in favor of pure bank borrowing
    Keywords: household, consumer loans, informal loans, Russia
    JEL: D14 G21 P2
    Date: 2013
  9. By: Gabriel Ulyssea
    Abstract: Este texto desenvolve um arcabouço que permite analisar os impactos micro e macroeconômicos de diferentes políticas para formalização. O modelo é estimado e utilizado para avaliar os efeitos das duas principais abordagens para reduzir a informalidade: i) diminuir os custos da formalidade; e ii) elevar os custos da informalidade. Os resultados mostram que há importantes tradeoffs entre os impactos micro e macro destas abordagens. Políticas que visam aumentar os custos da informalidade têm efeitos piores sobre as firmas que políticas que reduzem os custos da formalização. O oposto é verdade para os indicadores macroeconômicos. Quando considerados os efeitos líquidos sobre o bem-estar agregado, políticas que aumentam o custo da informalidade têm melhor desempenho. Não obstante, reduções no grau de informalidade não estão necessariamente associadas a mais bem-estar. This paper develops a framework for performing ex ante evaluations of the micro (at the firm level) and macro impacts of formalization policies. I estimate the model and use it analyze the two main policy approaches towards informality: increasing the costs of informality (the stick), and reducing the costs of formality (the carrot). The results show that there exist important tradeoffs between their micro and macro effects: while stick policies have uniformly worse effects on firms, their effects on aggregate outcomes are better than carrot policies. In net terms, however, stick policies have better welfare effects. Under either approach, informality reductions are not necessarily associated to welfare gains.
    Date: 2013–11

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