nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒01‒09
fourteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality and Access to Finance : Evidence from India By Beck, T.H.L.; Hoseini, M.
  2. Informal employment in transition countries: empirical evidence and research challenges By H. Lehmann
  3. Undeclared Labour in Unionized Oligopoly By Minas Vlassis; Stefanos Mamakis
  4. Dual Labour Markets and (Lack of) On-the-Job Training: PIAAC Evidence from Spain and Other EU Countries By Cabrales, Antonio; Dolado, Juan J.; Mora, Ricardo
  5. Guest Workers in the Underground Economy By Djajic, Slobodan; Mesnard, Alice
  6. Labour Market Matters - November 2014 By Tran, Vivian
  7. Women and political change: Evidence from the Egyptian revolution By Nelly EL MALLAKH; Mathilde MAUREL; Biagio SPECIALE
  8. How High Might the Revenue-maximizing Tax Rate Be? By Dan Usher
  9. The Elasticity of Taxable Income and Income-shifting: What is "Real" and What is Not? By Jarkko Harju; Tuomas Matikka
  10. Stability in informal insurances: an approach by networks and overlapping coalitions By Messan Agbaglah
  11. Insurance companies of the poor By Bold, Tessa; Dercon, Stefan
  12. Digital piracy: an update By BELLEFLAMME, Paul; PEITZ, Martin
  13. Software piracy and scientific publications: knowledge economy evidence from Africa By Asongu Simplice
  14. Propuesta de una Pensión Universal Proporcional en México By Alejandro Villagómez; Gabriel Ramírez

  1. By: Beck, T.H.L. (Tilburg University, Center For Economic Research); Hoseini, M. (Tilburg University, Center For Economic Research)
    Abstract: This paper gauges the effect of financial deepening and bank outreach on informality using micro data from the Indian manufacturing sector and exploiting cross-industry variation in the need for external finance. We distinguish between two channels through which access to finance can reduce informality: reducing the entry barrier to the formal sector and increasing productivity of formal firms. We find that bank outreach has a stronger effect on reducing the incidence of informality by cutting barriers to entering the formal economy, especially for smaller firms, and thus diminishing opportunistic informality. In comparison, financial deepening increases the productivity of formal sector firms while it has no significant impact on informal sector firms.
    Keywords: nformality; Financial Development; India
    JEL: G21 G28 O15 O16
    Date: 2014
  2. By: H. Lehmann
    Abstract: Even though informal employment is wide-spread in transition economies the literature on this phenomenon in the region is rather scarce. For policy makers it is important to know the incidence and the determinants of informal employment. In the first part of the paper we demonstrate that its incidence and to a lesser degree its determinants depend on the definition used. We then discuss studies that attempt to test for labor market segmentation in transition economies along the formal-informal divide. The presented results are inconclusive and we come to the conclusion that more work needs to be done before we can make definitive statements about whether labor markets are integrated or segmented in transition economies. Last but not least we introduce a new research area that links risk preferences and selection into labor market states. We show that if individuals have a choice, relatively risk loving workers have an increased likelihood to choose informal employment and self-employment.
    JEL: D03 J43 P23
    Date: 2014–12
  3. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Stefanos Mamakis (Department of Economics, University of Crete)
    Abstract: Undeclared labour constitutes a complex phenomenon that has not yet been analyzed within I/O framework. In a unionized duopoly under decentralized wage bargaining context, we reveal the opportunity cost that exists between the taxation and the contributions for social insurance. Comparing to a benchmarking state where no undeclared labour exist, our findings indicate that if the tax rate is low enough, the rate of undeclared labour that maximizes firms' profit will yield greater clearing wages, greater output and thus employment, greater consumer surplus and lower price. Furthermore, in contrast to common knowledge, we showed that under certain circumstances, undeclared labour may increase firms� profits and unions' utility, but it may also increase public revenues and social welfare. Finally, we propose a Pareto optimal tax rate for the case that firms practice undeclared labour. The proposed tax rate will render greater values in all market's magnitudes (wages, profits, quantities, consumer surplus, and social welfare). However, this policy proves that this specific policy lacks financing.
    Keywords: Undeclared Labour, Cournot Duopoly, Labour Unions, Unionisation, Endogenous Objectives
    JEL: J50 J51 L13 E26 H26
    Date: 2014–12–03
  4. By: Cabrales, Antonio (University College London); Dolado, Juan J. (European University Institute); Mora, Ricardo (Universidad Carlos III de Madrid)
    Abstract: Using the Spanish micro data from the Programme for the International Assessment of Adult Competencies (PIAAC), we first document how the excessive gap in employment protection between indefinite and temporary workers leads to large differentials in on-the-job training (OTJ) against the latter. Next, we find that that the lower specific training received by temporary workers is correlated with lower literacy and numeracy scores achieved in the PIAAC study. Finally, we provide further PIAAC cross-country evidence showing that OJT gaps are quite lower in those European labour markets where dualism is less entrenched than in those where it is more extended.
    Keywords: dual labour market, on-the-job training, cognitive skills, severance pay
    JEL: C14 C52 D24 J24
    Date: 2014–11
  5. By: Djajic, Slobodan; Mesnard, Alice
    Abstract: Guest-worker programs have been providing rapidly growing economies with millions of temporary foreign workers over the last couple of decades. With the duration of stay strictly limited by program rules in most of the host countries and wages paid to guest workers often set at sub-market levels, many of the migrants choose to overstay and seek employment in the underground economy. This paper develops a general-equilibrium model that relates the flow of guest workers transiting to the underground economy to the rules of the program, enforcement measures of the host country and market conditions facing migrants at home and abroad.
    Keywords: temporary migration; underground economy; undocumented workers
    JEL: F22
    Date: 2014–07
  6. By: Tran, Vivian
    Abstract: While proponents argue that minimum wage laws are essential in improving social welfare and economic well-being, implementation of minimum wage laws can also be associated with increased unemployment and the movement of workers into the informal sector where worker protection and workplace standards are less likely to be observed compared to the formal sector. A paper entitled “Estimating the Effects of Minimum Wage in a Developing Country: a Density Discontinuity Design Approach†(CLSRN Working Paper no.142) by CLSRN affiliate Hugo Jales (University of British Columbia), proposes a novel framework to empirically assess the effect of the minimum wage on unemployment, average wages, sector mobility, wage inequality, the size of the informal sector, and on labour tax revenues. The study finds that while minimum wage policy can increase average wages and reduce wage inequality, the policy has the unintended effect of causing labor tax revenues to fall as a result of workers shifting from the formal to informal sectors. Proponents of unionization assert that unions have beneficial social welfare impacts, such as providing workers with improved wage rates, fringe benefits and working conditions, but other evidence points to the negative effects of unions on corporate profits, investment, and employment growth. More recently, research has examined the potential for spillover effects of unions on the wage outcomes of non-unionized workers. Indeed, examination of spillover effects of union wage outcomes in the United States has been found to account for up to one-third of the growth in American wage inequality in recent decades. In a paper entitled “The Effect of Labour Relations Laws on Union Density Rates: Evidence from Canadian Provinces†(CLSRN Working Paper no. 141), CLSRN affiliates Scott Legree (University of Waterloo), Tammy Schirle (Wilfrid Laurier University) and Mikal Skuterud (University of Waterloo) examine the impact of changes in labour relation laws on union density rates in Canada. They find that while changes to labour relations laws have the potential to greatly increase union density rates, increased unionization through labour relations reform tends to benefit workers who would enjoy relatively high wages even in the absence of unions. Consequently, the authors argue that reforms in labour relations laws are unlikely to result in significant reductions in wage inequality
    Keywords: Minimum Wage, Informality, Unemployment, Density Discontinuity, Design, Wage Inequality, Labor Tax Revenues, Formal Sector, Labour relations legislati
    JEL: J60 J31 J30 J50 J58 K31
    Date: 2014–11–27
  7. By: Nelly EL MALLAKH (FERDI); Mathilde MAUREL (Centre d'Economie de la Sorbonne CNRS - Université Paris 1); Biagio SPECIALE (FERDI)
    Abstract: We analyze the effects of the 2011 Egyptian revolution on the relative labor market conditions of women and men using panel information from the Egypt Labor Market Panel Survey (ELMPS). We construct our measure of intensity of the revolution – the governorate-level number of martyrs, i.e. demonstrators who died during the protests - using unique information from the Statistical Database of the Egyptian Revolution. We find that the revolution has reduced the gender gap in labor force participation, employment, and probability of working in the private sector, and it has caused an increase in women’s probability of working in the informal sector. The political change has affected mostly the relative labor market outcomes of women in households at the bottom of the pre-revolution income distribution. We link these findings to the literature showing how a relevant temporary shock to the labor division between women and men can have long run consequences on the role of women in society.Online Appendix :
    JEL: J16 J21 J22 J30
    Date: 2014–12
  8. By: Dan Usher (Queen's University)
    Abstract: Through tax evasion, through the labour-leisure choice or in other ways, taxpayers reduce the tax base in response to an increase in the tax rate. The process is commonly-believed to generate a humped Laffer curve with a revenue-maximizing tax rate well short of 100%. That need not be so. In the “new tax responsiveness literatureâ€, the revenue-maximizing tax rate is inferred from the observed “elasticity of taxable incomeâ€. It is shown in this article 1) that the inference is unwarranted because the elasticity of taxable income may vary with the tax rate, 2) that the “new tax responsiveness literature†imposes the implicit assumption that tax revenue falls to 0 when the tax rate rises to 100%, 3) that tax revenue may increase together with the tax rate all the way up to 100% and 4) that the Laffer curve is ill-defined because tax revenue at any given rate may depend upon how tax revenue is spent.
    Keywords: revenue-maximizing tax rate, Laffer curve
    JEL: H21 H23
    Date: 2014–12
  9. By: Jarkko Harju; Tuomas Matikka
    Abstract: Previous literature shows that income taxation significantly affects the behavior of high-income earners and business owners. However, it is still unclear how much of the response is due to changes in effort and other real economic activity, and how much is caused by tax avoidance and tax evasion. This distinction is important because it affects the welfare implications and policy recommendations. In this paper we distinguish between real responses and tax-motivated income-shifting between tax bases. We show how the explicit inclusion of income-shifting affects the welfare analysis of income taxation. In our empirical example we find that income-shifting accounts for over two thirds of the overall elasticity of taxable dividend income among Finnish business owners. The large income-shifting response significantly decreases the marginal excess burden compared to the standard model in which the overall elasticity defines the welfare loss. However, in addition to income-shifting, we find that dividend taxation significantly affects the real behavior of owners.
    Keywords: elasticity of taxable income, tax avoidance, income-shifting, real responses
    JEL: H32 H24 H25
    Date: 2014–09–11
  10. By: Messan Agbaglah (Département d'économique, Université de Sherbrooke)
    Abstract: Based on empirical facts, we build a model of informal insurance institutions and study their stability. In our setting, risk sharing groups are overlapping homogenous coalitions, originating from networks of historical trust relationships. We derive a general folk theorem that works in an environment of uncertainty and we identify the determinants of stability which are robust to social norms. Our results provide theoretical explanations for empirical findings, including the puzzle that rich families in rural economies in developing countries consume less. Our approach bridges the two traditional approaches of clubs and bilateral agreements.
    Keywords: Informal insurance, networks, overlapping coalitions, stability
    JEL: O17 Z13 D85 D71
    Date: 2014–10
  11. By: Bold, Tessa; Dercon, Stefan
    Abstract: We model the emergence of formal insurance institutions as equilibria under limited contract enforceability where groups are required to be coalition-proof but also can use fines for enforcement. The model can generate coexistence of formal and informal groups without requiring heterogeneity in insurance demand, because coalition-proof equilibria can fail to exist. It also predicts where formal insurance is likely to flourish: insurance groups that hold savings become more prevalent the more enforcement power communities have, and the more enforcement power, the better insurance. We use data on Ethiopian funeral insurance groups and their members to motivate and test our model. Those which hold savings and collect regular premia provide better insurance than informal ones, and both sets of groups employ a variety of punishment mechanisms to induce their members to share risk. Despite the observed positive correlation between formality and the quality of insurance, informal and formal groups co-exist. Consistent with predictions generated by the model, we find that standard measures of social cohesion are linked to the use of punishment mechanisms, the quality of insurance and the prevalence of formal insurance institutions.
    Keywords: institutions; insurance; limited commitment; savings; social capital
    JEL: C73 D02 E21
    Date: 2014–12
  12. By: BELLEFLAMME, Paul (Université catholique de Louvain, CORE and LSM, Belgium); PEITZ, Martin (University of Mannheim)
    Abstract: This note summarizes and updates our previous survey of the economics of digital piracy (Belleflamme and Peitz, 2012).
    Keywords: information good, piracy, copyright, IP protection, internet, peer-to-peer, software, music
    JEL: L11 L82 L86
    Date: 2014–06–11
  13. By: Asongu Simplice (Yaoundé/Cameroun)
    Abstract: This paper is an extension of the debate on the nexus between the strength of IPRs and prospects for knowledge economy. It assesses the relationships between software piracy and scientific publications in African countries for which data is available. The findings which reveal a positive nexus are broadly consistent with the school of thought postulating that, the East Asian miracle has been largely due to weaker IPRs regimes at the early stages of development. As a policy implication, less stringent IPRs regimes on scientific-related software (at least in the short-run) will substantially boost contributions to and dissemination of knowledge through scientific and technical publications in Africa. IPRs laws (treaties) on scientific-oriented software should be strengthened in tandem with progress in: scientific and technical publications and; knowledge spillovers essential for economic growth and development. More policy implications are discussed.
    Keywords: Publications; Piracy; Intellectual property rights; Governance; Africa
    JEL: A20 F42 O34 O38 O55
    Date: 2014–08
  14. By: Alejandro Villagómez (Division of Economics, CIDE); Gabriel Ramírez
    Abstract: Contributory pension system coverage has been low. High mobility between formal and the informal sector results in low contribution density which does not guarantee a minimum pension. The state has created cash transfer programs, which can disincentive formality. This paper proposes a proportional pension for formal employees, which replaces the fixed cash transfer, following the experience of Chile (2008). We follow the Valdés-Prieto approach (2008), which minimizes labour-market distortions. Under the assumption of linear income trajectory, we show that the total value of pensions can increase in 45.6% on average, and fiscal savings in 14.8% when compared to a non-contributory pension program as “65 y Más”.
    Keywords: Contributory pension system, coverage, Mexico, formal sector, informal sector
    JEL: H55 H53 I38
    Date: 2013–10

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