nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2014‒12‒19
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Unemployment Insurance, Job Search, and Informal Employment By David Margolis; Lucas Navarro; David A. Robalino
  2. Economic Reforms, Frictional Unemployment and Wage Inequality-----A General Equilibrium Analysis By Bandopadhyay, Titas Kumar
  3. Estimating the Effects of Minimum Wage in a Developing Country: A Density Discontinuity Design Approach By Jales, Hugo
  4. Dodging the Taxman: Firm Misreporting and Limits to Tax Enforcement By Paul Carrillo; Dina Pomeranz; Monica Singhal

  1. By: David Margolis (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, IZA - Forschungsinstitut zur Zukunft der Arbeit (Institute for the Study of Labor) - Bonn Universität - University of Bonn); Lucas Navarro (ILADES - Universidad Alberto Hurtado); David A. Robalino (Social Protection and Labor Sector, Human Development Department - The World Bank)
    Abstract: This paper analyses the potential impacts of introducing unemployment insurance (UI) in middle income countries using the case of Malaysia, which today does not have such a system. The analysis is based on a job search model with unemployment and three employment sectors: formal and informal wage employment, and self employment. The parameters of the model are estimated to replicate the structure of the labor market in Malaysia in 2009 and the distribution of earnings for informal, formal and self employed workers. The results suggest that unemployment insurance would have only a modest negative effect on unemployment if benefits are not overly generous. The main effect would be a reallocation of labor from wage into self employment while increasing average wages in the formal and informal sectors.
    Keywords: Unemployment insurance, Informal sector, Self employment, Job search
    Date: 2014–07
  2. By: Bandopadhyay, Titas Kumar
    Abstract: In this paper we extend the benchmark model of Diamond-Mortensen-Pissarides in a two-sector general equilibrium framework by introducing a frictionless segment of the labour market. The two sectors are the frictionless informal sector and the frictional formal sector where match friction is the root cause of unemployment. Here,both wages are flexible. Informal wage is determined by the marginal productivity rule of the worker and the formal wage is determined by the Nash-bargaining solution. We alsoexamine the effects of trade reforms and labour market reforms on equilibrium rate of unemployment and wage inequality in our stylitzed economy. We find that both these reforms reduce equilibrium rate of unemployment. However, trade reforms raise wage inequality but labour market reforms reduce it. These results provide a strong theoretical basis for labour market reform in a small open economy characterized by frictional labour market.
    Keywords: Economic reforms, Frictional unemployment, Wage inequality, Jobsearching, Job-matching, General equilibrium.
    JEL: J6
    Date: 2014–11–10
  3. By: Jales, Hugo
    Abstract: This paper proposes a new framework to empirically assess the effects of the minimum wage in a developing country. This approach allows us to jointly estimate the effects of the minimum wage on unemployment, average wages, sector mobility, wage inequality, the size of the informal sector and on labor tax revenues. I show that under reasonable assumptions, cross-sectional data on the worker's wage and sector status can identify the joint distribution of the latent counterparts of these variables; that is, the sector status and wage that would prevail in the absence of the minimum wage. I also identify parameters that govern how the minimum wage affects the economy. My identification strategy, building on Doyle (2006), specifies a parametric form for the conditional distribution of sector status, given wage. I show how the discontinuity of the wage distribution around the minimum wage identifies the extent of non-compliance with the minimum wage policy, and how the conditional probability of sector status given wage recovers the relationship between latent sector status and wages. I apply the method in the “PNADâ€, a nationwide representative Brazilian cross-sectional dataset from years 2001 to 2009. I show on the application that the assumptions used are not violated in the context of the Brazilian labor market. The results show that the size of the informal sector is increased by around 46% when compared to the scenario in the absence of the minimum wage. This result is driven by both two sources: (i) unemployment effects on the formal sector, (ii) movements of workers from the formal to the informal sector as a unintended consequence of the policy. In addition, the minimum wage legislation strongly affects wage inequality, reducing up to 20% the standard deviation of log-wages, and reduces revenues from labor taxes up to 15%.
    Keywords: Minimum Wage, Informality, Unemployment, Density Discontinuity, Design, Wage Inequality, Labor Tax Revenues, Formal Sector
    JEL: J60 J31 J30
    Date: 2014–10–24
  4. By: Paul Carrillo; Dina Pomeranz; Monica Singhal
    Abstract: Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature has argued that the ability to verify taxpayer self-reports against reports from third parties is critical for modern tax enforcement and the growth of state capacity. However, there may be limits to the effectiveness of third-party information if taxpayers can make offsetting adjustments on less verifiable margins. We present a simple framework to demonstrate the conditions under which this will occur and provide strong empirical evidence for such behavior by exploiting a natural experiment in Ecuador. We find that when firms are notified by the tax authority about detected revenue discrepancies on previously filed corporate income tax returns, they increase reported revenues, matching the third-party estimate when provided. Firms also increase reported costs by 96 cents for every dollar of revenue adjustment, resulting in minor increases in total tax collection.
    JEL: H25 H26 O23 O38
    Date: 2014–10

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