nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒01‒24
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Immigration and the Informal Labor Market By Bosch, Mariano; Farré, Lídia
  2. Re-defining Informal Employment and Measuring its Determinants: Evidence from Russia By Lehmann, Hartmut; Zaiceva, Anzelika
  3. Minimum Wages, Unemployment and Informality: Evidence from Panel Data on Russian Regions By Muravyev, Alexander; Oshchepkov, Aleksey
  4. Informality and Long-Run Growth By Docquier, Frédéric; Müller, Tobias; Naval, Joaquín
  5. Social Insurance, Informality and Labor Markets: How to Protect Workers While Creating Good Jobs By Pagés, Carmen; Rigolini, Jamele; Robalino, David A.
  6. Just how good is unemployment as a measure of welfare? A policy note By Emmanuel S. de Dios; Katrina Dinglasan
  7. Austerity plans and tax evasion : theory and evidence from Greece By Francesco Pappadà; Yanos Zylberberg
  8. Public Goods, Hidden Income, and Tax Evasion: Some Nonstandard Results from the Warm-Glow Model By Daniel M. Hungerman
  9. International Human Trafficking: Measuring Clandestinity by the Structural Equation Approach By Rudolph, Alexandra; Schneider, Friedrich
  10. Modern Maritime Piracy By Paul Hallwood; Thomas J. Miceli

  1. By: Bosch, Mariano (Inter-American Development Bank); Farré, Lídia (IAE Barcelona (CSIC))
    Abstract: This paper investigates the relationship between immigration and the size of the informal or underground economy. Using regional variation for the Spanish provinces we find that the massive immigration wave between 2000 and 2009 is highly correlated to the share of unregistered employment, a proxy for the size of the underground or informal labor market. We estimate that a 10 percentage points increase in the share of immigrants in a region generates between a 3 and 8 percentage points increase in unregistered employment. We also find that the controversial regularization of illegal aliens conducted in 2005 substantially reduced the number of illegal workers but did not affect the relationship between immigration and informality.
    Keywords: immigration, informal economy, amnesty
    JEL: J61 O17
    Date: 2013–12
  2. By: Lehmann, Hartmut (University of Bologna); Zaiceva, Anzelika (University of Modena and Reggio Emilia)
    Abstract: Informal activities impact countries' economic development and overall growth. However, studying informal employment is not easy and it is crucial to provide a valid definition of it. This paper contributes to the recent discussion of the measures of informality by taking advantage of a rich dataset on Russia over the period 2003 - 2011, that is before and after the economic downturn, together with a special supplement on informality that allows to construct different measures of informal employment and to analyze its determinants. We demonstrate that the incidence of informal employment varies across the different definitions. However, the determinants of informal employment are roughly stable across the different measures as long as we exclude firm size as a criterion. We also show that risk-averse individuals, as expected, are less likely to select themselves into informal employment.
    Keywords: informal employment, definitions, incidence, determinants, Russia
    JEL: J31 J40 P23
    Date: 2013–12
  3. By: Muravyev, Alexander (St. Petersburg University GSOM and IZA); Oshchepkov, Aleksey (Higher School of Economics, Moscow)
    Abstract: This paper revisits labor market effects of the minimum wage by taking advantage of a unique institutional setting and rich data from Russia that cover 89 regions over 10 years, from 2001 to 2010. Our empirical analysis draws on the methodology introduced by Neumark and Wascher, in which 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 that the minimum wage raises unemployment among young workers aged 15 to 24. In contrast, there is no evidence of disemployment effects of the minimum wage for workers aged 25-72, including women. In addition, minimum wage hikes are associated with an increase in informal employment.
    Keywords: minimum wages, unemployment, informal employment, Russia
    JEL: J38 J23
    Date: 2013–12
  4. By: Docquier, Frédéric (Université catholique de Louvain); Müller, Tobias (University of Geneva); Naval, Joaquín (Universitat Autònoma de Barcelona)
    Abstract: One of the most salient features of developing economies is the existence of a large informal sector. This paper uses quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor and long-run growth. Our model can generate transitory informality equilibria or informality-induced poverty traps. Its calibration reveals that the case for the poverty-trap hypothesis is strong: although informality serves to protect low-skilled workers from extreme poverty in the short-run, it prevents income convergence between developed and developing nations in the long run. Sudden elimination of informality would induce severe welfare losses for several generations on the transition path. Hence, we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means-tested education subsidies is the most cost-effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means-tested education and wage subsidies is even more effective.
    Keywords: informality, development, education, child labor, inequality
    JEL: O11 O15 O17
    Date: 2014–01
  5. By: Pagés, Carmen (Inter-American Development Bank); Rigolini, Jamele (World Bank); Robalino, David A. (World Bank)
    Abstract: This paper provides an overview of the main findings of the book "Social Insurance and Labor Markets: How to Protect Workers While Creating New Jobs." The book conceptualizes and reviews the empirical evidence on the potential distortions that the social insurance system of a country can have on the supply and demand side of the labor market, and proposes options to address them. The overall message is that current Bismarckian systems are inadequate to extend coverage to the entire labor force of a country and that, at the same time, can affect the level and structure of employment – for instance, by promoting informality and reducing participation rates. These effects can be important enough to deserve consideration in policy discussion. In part, they are explained by a series of explicit and implicit taxes and subsidies that emerge as part of the design of health insurance, pensions, and unemployment benefits programs. Going forward, there a few general principles that countries can follow to expand coverage while reducing potential distortions in labor markets. First, giving more flexibility to individuals in the choice of the bundle of social insurance programs, the level of benefits, and the portfolio of investments (in the case of savings programs), while providing better information and incentives to enroll. Second, relying on explicit, integrated, and in some circumstances means-tested redistributive arrangements in order to better contribute to reduce poverty and inequality. Finally, from the point of view of labor markets, by aiming to reduce perceived tax-wedges. This could be done by better linking contributions to benefits, improving the quality of services, and financing redistributive arrangements through general revenues.
    Keywords: social insurance, pensions, informality, pay-roll taxes, redistribution, labor markets
    JEL: J3 J6 H2 H3 I3 D3
    Date: 2013–12
  6. By: Emmanuel S. de Dios (School of Economics, University of the Philippines Diliman); Katrina Dinglasan (Philippine Center for Economic Development, Diliman, Quezon City)
    Abstract: The government is rightly concerned with employment generation to make growth inclusive. The use of the open unemployment rate to measure its success, however, is misplaced. In a developing country with a large informal sector and in the absence of unemployment insurance, open unemployment is primarily a middle-class phenomenon: the unemployed are not predominantly poor, and the poor are not predominantly unemployed. Measures of productivity and shifts of labour across sectors may contain more information.
    Keywords: unemployment, underemployment, labour force, welfare, poverty
    JEL: J21 I32
    Date: 2014–01
  7. By: Francesco Pappadà; Yanos Zylberberg
    Abstract: The austerity plans implemented in Greece in 2010 have yielded lower than expected increases in tax receipts. We argue that this has been the result of the arbitrage that firms face when choosing to declare their activity. A tax hike has a direct effect on the degree of tax evasion, and an indirect one through credit markets. A tax increase tightens the credit constraints of firms and depresses even further their incentives to be transparent. Using a dataset of about 30'000 Greek firms per year over the period 2002-2011, we provide evidence that firms adjust their declared profitability, and this adjustment depends on the tax burden and their need for credit. We then calibrate our model and show that leakages due to tax evasion are quite high : a 21% increase in tax rates only delivers a 7% increase in tax receipts. The response of transparency generates an additional investment slack which is the result of a contracting demand for credit by small and medium size firms induced by tax evasion.
    Keywords: tax evasion; austerity plans; credit frictions
    JEL: E44 O17 H26
    Date: 2014–01
  8. By: Daniel M. Hungerman
    Abstract: A large literature explores crowd out in situations where public goods are jointly provided; work in this area typically depicts a tax system where individuals take taxes as given. But in some settings, such as those in developing economies, efforts to evade or avoid taxes may be widespread. Using the canonical warm-glow model, this paper considers joint pubic-good provision in a setting where individuals can evade taxes by hiding their income. The model's implications change significantly in this setting: with hidden income, stronger warm glow will lead to greater crowd out, not less. Using research on crowd out and inter-family transfers, I present suggestive evidence that the model's results may help to reconcile divergent estimates of crowd out in the literature.
    JEL: H26 H41 O17
    Date: 2014–01
  9. By: Rudolph, Alexandra (Heidelberg University); Schneider, Friedrich (University of Linz)
    Abstract: Worldwide human trafficking (HT) is the third most often registered international criminal activity, ranked only after drug and weapon trafficking. The aim of the paper is to measure the extent of HT inflows to destination countries. It proposes the application of the Multiple Indicators Multiple Causes (MIMIC) structural equation model in order to include potential causes and indicators in one model and generate an index of the intensity of HT in destination countries. Thus, we account for the unobservable nature of the crime as well as for visible aspects that both shape the extent of it. By including both dimensions of the trafficking process the model is applied over a period of ten years. The resulting measure orders 142 countries between 2000 and 2010 according to their potential of being a destination country based on characteristics of the trafficking process. The results are that OECD countries are the most likely destination countries while developing countries are less likely.
    Keywords: human trafficking, MIMIC models, latent variable, structural equation models
    JEL: C39 F22 K42 K49
    Date: 2013–12
  10. By: Paul Hallwood (University of Connecticut); Thomas J. Miceli
    Abstract: This essay provides and economic analysis of the problem of modern-day maritime piracy. The essay first reviews the current scope of the problem, and then develops an economic of model of piracy that emphasizes the strategic interaction between the efforts of pirates to locate potential targets, and shippers to avoid contact. The model provides the basis for deriving an optimal enforcement policy, which is then compared to actual enforcement efforts, which, for a variety of reasons, have largely been ineffectual. The essay concludes by reviewing the law of maritime piracy and by offering some proposals for improving enforcement.
    Keywords: International law, law enforcement, piracy
    JEL: K14 K33
    Date: 2014–01

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