nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒09‒25
two papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The informal economy and the constraints that it imposes on pension contributions in Latin America By David Tuesta
  2. Employment and Firm Heterogeneity, Capital Allocation, and Countercyclical Labor Market Policies By Epstein, Brendan; Shapiro, Alan Finkelstein

  1. By: David Tuesta
    Abstract: Low contribution levels to pension schemes in Latin America are an enormous obstacle limiting the implementation of a broad-based social security system. Contribution rates measured as a ratio of contributors to the total labour force stand at an average of 40%, or 60% in the best of cases. Although previous studies explain this situation by factors related to growth, economic institutions and market considerations, only a few studies have quantified the specific determinants behind this problem. This study therefore aims to approach the subject by exploring the national household surveys for Brazil, Chile, Colombia, Mexico and Peru. Once the specific question relating to pension contributions has been identified in the surveys, probit models are used to estimate the probability that this event may occur, conditioned by the variables that theory considers to be explanatory. The study finds the enormous relevance of labour markets as a common conditional factor affecting the likelihood to contribute to any pension system in Latin America. Working in the informal economy, being a self-employed worker or working in a micro-enterprise are particularly significant and show the highest coefficients in this geographical region. The high impact of these variables may give clues for economic policy, in its search for eliminating the hurdles in labour market distortions that limit the impact of social security programmes.
    Keywords: Brazil, Chile, Colombia, Latin America, Mexico, Pension, Peru, AFORE, AFP, Pension contribution, Pension coverage, Retirement
    JEL: G23 H55 H75 J01 J26 J38 J32
    Date: 2014–08
  2. By: Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)); Shapiro, Alan Finkelstein (University of the Andes)
    Abstract: Many countries have large employment shares in micro and small firms that have limited access to formal financing and therefore rely on input credit. Such countries are mainly emerging and developing economies, whose business cycle dynamics are increasingly important for the global economy in light of the dramatic rise in international linkages and spillovers that have occurred over the last several decades. Emerging and developing economies implemented a host of countercyclical labor market policies amid the global financial crisis, but data limitations on high-frequency labor and job flows prevent a detailed empirical assessment of the effectiveness of these policies. To address this problem, we develop a business cycle model with frictional labor markets that is novel in light of its consistency with the employment and firm structure of emerging and developing economies. We use the model to assess the aggregate impact of key countercyclical labor market policies. We find that hiring subsidies and job intermediation services for large firms are particularly effective in aiding recoveries. Policies targeting smaller firms yield limited aggregate benefits and may even be detrimental to the recovery process. The labor market structure shapes sectoral allocation and explains the economy's differential response to policy.
    Keywords: Business cycles; search frictions; fiscal policy; self employment; small firms; input credit
    JEL: E24 E32 J64
    Date: 2014–08–21

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