nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒04‒18
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. “A panel data analysis of FDI and informal labor markets” By Antonio Baez
  2. Labor Informality: Choice or Sign of Segmentation? A Quantile Regression Approach at the Regional Level for Colombia By Garcia Cruz, Gustavo Adolfo
  3. The informal labour market in India : transitory or permanent employment for migrants? By Shonchoy, Abu S.; Junankar, P. N. (Raja)
  4. Shortages and the Informal Economy in the Soviet Republics: 1965-1989 By Kim, Byung Yeon; Shida, Yoshisada
  5. Where Has the Currency Gone? And Why? The Underground Economy and Personal Income Tax Evasion in the U.S., 1970-2008 By Cebula, Richard
  6. Does microfinance change informal lending in village economies? Evidence from Bangladesh By Asad Islam; Chau Nguyen; Russell Smyth
  7. Just a Few Cents Each Day: Can Fixed Regular Deposits Overcome Savings Constraints? By Anett Hofmann
  8. Une évaluation de la taille de l'économie informelle par un système complet de demande estimé sur données monétaires et temporelles By Armagan Tuna Aktuna Gunes; Christophe Starzec; François Gardes

  1. By: Antonio Baez (Faculty of Economics, University of Barcelona)
    Abstract: The objective of this paper is to examine whether informal labor markets affect the flows of Foreign Direct Investment (FDI), and also whether this effect is similar in developed and developing countries. With this aim, different public data sources, such as the World Bank (WB), and the United Nations Conference on Trade and Development (UNCTAD) are used, and panel econometric models are estimated for a sample of 65 countries over a 14 year period (1996-2009). In addition, this paper uses a dynamic model as an extension of the analysis to establish whether such an effect exists and what its indicators and significance may be. While the results shows that informal labor markets are significant and do positively affect the flow of FDI, these effects are felt up to a certain level of informality, above which the effect becomes negative. The results are similar for developed and developing countries and are robust to several checks.
    Keywords: Foreign Direct Investment, Informal labor markets, Institutions. JEL classification: F16, F23, J8, M5
    Date: 2014–02
  2. By: Garcia Cruz, Gustavo Adolfo
    Abstract: The labor market in developing countries is remarkably heterogeneous with a small productive formal sector, enjoying high wages and attractive employment conditions and another large informal sector with low productivity and volatile wages. The informal sector is particularly diverse. In this paper we examine the heterogeneity of the informal sector at regional level in Colombia. In general, our findings suggest that, both voluntary and involuntary informal employment co-exist by choice and as a result of labor market segmentation. We also find that there are striking differences in labor market characteristics between cities, in particular in the traditional informal segment.
    Keywords: Informality, local labor markets, quantile regression, selection bias, formal/informal wage gap decomposition
    JEL: C21 J31 J42 O17
    Date: 2014–04–01
  3. By: Shonchoy, Abu S.; Junankar, P. N. (Raja)
    Abstract: The informal economy is a very important sector of the Indian economy. The National Council of Applied Economic Research estimates that the informal sector - "unorganised sector" - generates about 62% of GDP and provides for about 55% of total employment (ILO 2002, p. 14). This paper studies the characteristics of the workers in the informal economy and whether internal migrants treat this sector as a temporary location before moving on to the organised or formal sector to improve their lifetime income and living conditions. We limit our study to the Indian urban (non-agricultural) sector and study the characteristics of the household heads that belong to the informal sector (self-employed and informal wage workers) and the formal sector. We find that household heads that are less educated, come from poorer households, and/or are in lower social groups (castes and religions) are more likely to be in the informal sector. In addition, our results show strong evidence that the longer a rural migrant household head has been working in the urban sector, ceteris paribus, the more likely that individual has moved out of the informal wage sector. These results support the hypothesis that, for internal migrants, the informal wage labour market is a stepping stone to a better and more certain life in the formal sector.
    Keywords: Labor market, Informal sector, Migrant labor, Caste, Religion, Informal labour markets, Migrant
    JEL: J15 J42 J61 O17
    Date: 2014–03
  4. By: Kim, Byung Yeon; Shida, Yoshisada
    Abstract: We measure the informal economy and shortages of consumer goods in the Soviet republics from 1965 to 1989 to estimate the relationships of these two variables. We use fixed-effect model and instrument variable approach and find that the informal economy and shortages reinforce each other. Results indicate that the Soviet central planning system is difficult to sustain in the long run. A substantial heterogeneity across the Soviet republics exists not only in the extent of the informal economy and shortages, but also in the associations of the two variables.
    Keywords: shortages, informal economy, Soviet republics
    JEL: P21 P27 P36
    Date: 2014–03
  5. By: Cebula, Richard
    Abstract: Unaccounted for currency in the U.S. is argued to reflect the presence of widespread income tax evasion. This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of federal personal income tax evasion over the period 1970-2008. In this study, we use the most recent data available on personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI (adjusted gross income) to reported AGI. Other studies of federal income tax evasion for the U.S. are dated and do not use data this current. It is found that personal income tax evasion was an increasing function of the maximum marginal federal personal income tax rate, the percentage of federal personal income tax returns characterized by itemized deductions, and unpopular military engagements, in this case, the War in Iraq, and a decreasing function of the Tax Reform Act of 1986 (during its first two years of being implemented), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes (as a measure of the incentive effect of a better return to tax avoidance, which is legal), and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel.
    Keywords: underground economy; tax evasion; tax rates; audit rates
    JEL: H24 H26 H31 K42
    Date: 2014–04–12
  6. By: Asad Islam; Chau Nguyen; Russell Smyth
    Abstract: This paper examines how availability of microfinance influences households’ borrowing from informal sources in village economies. It uses a unique household level panel data set, which spans more than two decades (1987-2008), from rural villages in Bangladesh. We find that households’ access to microfinance reduces the incidence of borrowing from informal sources, but not the amount of borrowing. There are heterogeneous effects in which less poor households benefit more in terms of reducing their reliance on informal borrowing and the benefit accrues over time. We also find heterogeneity across households with respect to occupation, which can be explained by differing trends in occupational transition between microfinance borrowers and non-borrowers. In terms of gender differences, while women are target clients for MFIs, having access to microfinance increases women’s informal borrowing for small consumption usage, without facilitating access to new business opportunities.
    Keywords: microfinance, Bangladesh, informal loan, long-term effects
    JEL: C21 C23 G21 O12 Q00
    Date: 2014–04
  7. By: Anett Hofmann
    Abstract: Empirical evidence suggests that there is a high demand for informal savings mechanisms even though these often feature negative returns - such as deposit collectors, ROSCAs, microloans, and informal borrowing. This paper argues that individuals may face even higher negative returns to saving at home due to hyperbolic discounting and claims on savings by relatives. I outline a model that shows why hyperbolic discounters cannot reach their welfare-maximising level of savings, and why a commitment savings product with fixed period contributions can increase their achievable savings level. Using a novel dataset obtained from a small microfinance institution in Bangladesh, the paper then presents some first empirical evidence on the effects of a commitment savings product with fixed regular instalments. I find that the introduction of the regular saver product was associated with an increase in individuals' savings contributions of 180 percent after a periods of five months. The paper concludes that the provision of commitment savings products with fixed contributions may reduce savings constraints and increase individuals' welfare, providing a substitute for costly informal mechanisms. However, since the data originates from a field study with self-selection problems rather than a randomized controlled experiment, further studies are needed to confirm this effect.
    Keywords: commitment savings, hyperbolic discounting, Bangladesh
    JEL: D14 O11 O16
    Date: 2014–03
  8. By: Armagan Tuna Aktuna Gunes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Christophe Starzec (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); François Gardes (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: Afin d'estimer la taille de l'économie informelle en Turquie, nous estimons un système de demande basé sur l'analyse du comportement de consommation proposée par Pissarides, Weber [1989], Lyssiotou et al. [2004] et Fortin et al. [2009]. Cette estimation est effectuée sur les dépenses monétaires et sur la somme des dépenses monétaires et temporelles (consacrées aux activités domestiques des ménages). Les informations nécessaires sur les inputs monétaires et temporels dans les dépenses de consommation des ménages sont obtenues par l'appariement statistique des enquêtes turques sur le Budget des Familles avec l'enquête sur l'Emploi du Temps [2006]. Comme prévu, la taille de l'économie informelle en Turquie estimée en utilisant les dépenses complètes (temps plus monnaie) est plus élevée que celles obtenues par l'approche des dépenses monétaires (respectivement 40,6% et 33,5% du PIB pour les travailleurs indépendants et 20,7% et 14,1% du PIB pour les salariés) et également plus élevée que celle obtenue par les méthodes macroéconomiques plus conventionnelles (35,1%).
    Keywords: Economie informelle; système complet de demande; dépenses complètes
    Date: 2014–03

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