nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒08‒09
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies By Luz Adriana Flórez
  2. The Efficiency of the Informal Sector on the Search and Matching Framework By Luz Adriana Flórez
  3. Optimal Policy with Informal Sector and Endogenous Savings By Luz Adriana Flórez
  4. Defining and Measuring Informality in the Turkish Labor Market By Kan, Elif Oznur; Tansel, Aysit
  5. Financial frictions, occupational choice and economic inequality By Lian Allub; Andres Erosa Etchebehere
  6. Strictness of tax compliance norms: A factorial survey on the acceptance of inheritance tax evasion in Germany By Abraham, Martin; Lorek, Kerstin; Richter, Friedemann; Wrede, Matthias

  1. By: Luz Adriana Flórez
    Abstract: This paper contributes to the theoretical analysis of the informal sector in the search and matching framework. Building upon the work of Albrecht et al. (2009), where the informal sector consists of unregulated self-employment, I describe the search and matching equilibrium in an economy with an informal sector where workers are risk neutral and the government can observe when a worker is formal and informal. In this case I solve the matching equilibrium by introducing three policies: unemployment benefits, a formal lump sum tax, and a job creation subsidy. I analyze the effects of these policies on unemployment rates, formal employment and informal employment. I show that these policies affect the incentives of workers to be formal or informal changing the composition of these two types of workers in the labor market.
    Keywords: Policies, Search and Matching, Informal Sector.
    JEL: J65 J68
    Date: 2014–07–18
  2. By: Luz Adriana Flórez
    Abstract: This paper analyzes efficiency in an economy with an informal sector that consists of unregulated self-employment, and where there are no costs of being informal, (Albrecht et al. (2009)). First, assuming workers in the formal sector are ex-ante heterogeneous, I show that this type of economy is inefficient. Second, I identify the optimal policies the government can implement, where the informal sector is unobserved (or search effort is unobserved). Allowing the government to use different policies such as social security payment, severance payment, formal tax, and job creation subsidy, I show that the government cannot affect worker’s behavior by using severance and social security payments because of the risk neutrality assumption (Lazear (1990)). However, it can achieve an efficient allocation through a tax-credit policy. This result is interesting since it can guide the way in which social security programs can be implemented in developing countries, where in general social protection programs are assumed to subsidize informal activities.
    Keywords: Efficiency, Informal Sector, Hidden Search Effort.
    JEL: H21 J64 J65
    Date: 2014–07–21
  3. By: Luz Adriana Flórez
    Abstract: This paper analyzes the effect of social security and lump sum layoff payment in an economy with an informal sector and savings, where the search effort is unobserved. I characterize the optimal consumption/search/non-participant strategy assuming that workers are risk averse and that formal jobs last forever. After including job destruction shocks I solve the model numerically, and focus on the effects of lump sum layoff and social security payments on workers’ decision to be formal, informal or non-participant. I find that severance payments protect formal workers against the unemployment risk. With severance payments workers do not over-accumulate to protect themselves against unemployment, instead they increase the search effort through the re-entitlement effects. In this respect my work resembles that of Coles (2006). I find that in the steady state a high severance payment increases the proportion of formal workers while reduces the proportion of informal workers and those who decide not to participate in the labor market. Even though the optimal policy with severance payment is generous, I find that in the steady state the unemployment rate is low and welfare improves.
    Keywords: Social security payment, Severance payment, Informal sector, Hidden search effort, Savings.
    JEL: D91 J32 J64 J65
    Date: 2014–07–23
  4. By: Kan, Elif Oznur; Tansel, Aysit
    Abstract: This paper investigates how informality can be defined and measured in the Turkish labor market. Two alternative definitions of informality are used to explore their relevance and implications for the Turkish labor market using descriptive statistics. They are the enterprise definition and the social security definition. Further, contributions of individual and job characteristics to the likelihood of informality are investigated using multivariate probit analysis under the two definitions. The social security registration criterion is found to be a better measure of informality in the Turkish labor market given its ability to capture the key relationships between several individual and employment characteristics and the likelihood of informality.The study suggests that preference should be given to social security definition of labor informality for a more accurate depiction of the Turkish labor market. The suitability of the two alternative definitions of informality in the Turkish labor market and its implications have not been investigated before.
    Keywords: Informality, Definition, Measurement and Likelihood, Turkey
    JEL: J2 J24
    Date: 2014–08–03
  5. By: Lian Allub; Andres Erosa Etchebehere
    Abstract: We develop a quantitative theory of entrepreneurship, income inequality, and financial frictions disciplined with household data from Brazil. The theory extends Lucas (1978) by modeling heterogeneity in two skills: -working and managerial skills. Consistently with the evidence, the theory implies three occupational categories: workers, employers, and self-employed entrepreneurs. We find that the removal of financial frictions decreases self-employment rates from 24% to 11% (with small effects on the number of employers), increases aggregate output by 48%, and has non- trivial effects on the distribution of income. We also find that while most households benefit from a reform that eliminates enforcement problems, the majority of employers (about two thirds) lose from the reform. By depressing the demand for labor, limited enforcement depresses the equilibrium wage rate, increasing the profits of employers. Our theory thus suggests that employers in Brazil may have a vested interested in maintaining a status quo with low enforcement.
    Date: 2014–07
  6. By: Abraham, Martin; Lorek, Kerstin; Richter, Friedemann; Wrede, Matthias
    Abstract: Using the example of the inheritance tax, this paper examines whether and how the strictness of tax compliance norms depends on the interrelation between tax objectives, tax design, and taxed behavior. Building on the literature on tax evasion, optimal inheritance taxation, family economics, and social norms, the paper hypothesizes that a larger non-declared amount of transfer decreases the acceptability of tax evasion and that both an asset with emotional value and a higher degree of kinship increase the acceptance of evasion. Utilizing a survey with an experimental design on the acceptance of inheritance tax evasion that was conducted in Germany in 2012, the paper confirms these hypotheses empirically. The results indicate that violating a compliance norm is justifiable if the tax objectives are not infringed upon by the evasion or if the tax design is not considered useful to accomplish the aim of the tax. In contrast, the norm violation is less acceptable, if the underlying goal is at stake. --
    Keywords: tax compliance,social norms,tax evasion,inheritance tax
    JEL: H21 H24 H26
    Date: 2014

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