nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒02‒05
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Financial frictions, informality and income inequality By Merlin, Giovanni Tondin; Kuhl Teles, Vladimir
  2. Determinants of Transitions across Formal / Informal Sectors in Egypt By Tansel, Aysit; Ozdemir, Zeynel Abidin
  3. The Size of Informal Economy and Demand Elasticity Estimates Using Full Price Approach: A Case Study for Turkey. By Armagan Tuna Aktuna-Gunes; François Gardes; Christophe Starzec
  4. 30,000 Minimum Wages: The Economic Effects of Collective Bargaining Extensions By Pedro S. Martins
  5. The Impact of Syrian Refugees on Natives' Labor Market Outcomes in Turkey: Evidence from a Quasi-Experimental Design By Ceritoglu, Evren; Gurcihan Yunculer, H. Burcu; Torun, Huzeyfe; Tumen, Semih
  6. Norms, Enforcement, and Tax Evasion By Besley, Timothy J.; Jensen, Anders; Persson, Torsten
  7. Tax evasion and the optimal non-linear labour income taxation By Salvador Balle; Lucia Mangiavacchi; Luca Piccoli; Amedeo Spadaro
  8. Who is audited? Experimental study on rule-based and human tax auditing schemes By Yoshio Kamijo; Takehito Masuda; Hiroshi Uemura

  1. By: Merlin, Giovanni Tondin; Kuhl Teles, Vladimir
    Abstract: We studied the effects of changes in banking spreads on distributions of income, wealth and consumption as well as the welfare of the economy. This analysis was based on a model of heterogeneous agents with incomplete markets and occupational choice, in which the informality of firms and workers is a relevant transmission channel. The main finding is that reductions in spreads for firms increase the proportion of entrepreneurs and formal workers in the economy, thereby decreasing the size of the informal sector. The effects on inequality, however, are ambiguous and depend on wage dynamics and government transfers. Reductions in spreads for individuals lead to a reduction in inequality indicators at the expense of consumption and aggregate welfare. By calibrating the model to Brazil for the 2003-2012 period, it is possible to find results in line with the recent drop in informality and the wage gap between formal and informal workers
    Date: 2014–12–12
  2. By: Tansel, Aysit (Middle East Technical University); Ozdemir, Zeynel Abidin (Gazi University)
    Abstract: Informality is a salient feature of labor market in Egypt as it is the case with many developing countries. This is the first study of the determinants of worker transitions between various labor market states using panel data from Egypt. We first provide a diagnosis of dynamic worker flows across different labor market states. We develop transition probabilities by gender across different labor market states utilizing Markov transition processes. Next we identify the effects of individual, household, job characteristics and location on different mobility patterns by estimating a multinomial logit regression. The results point to the highly static nature of the Egyptian labor market. Government employment and the out of labor force are the most persistent labor market states. Further, only a few of the explanatory variables except high levels of education are found to have predictive power in explaining the transitions from formal wage, informal wage, self-employment, unemployment government employment and out of labor market states.
    Keywords: labor market dynamics, informality, Markov processes, multinomial logit, Egypt
    JEL: J21 J24 J40 J63 O17
    Date: 2015–01
  3. By: Armagan Tuna Aktuna-Gunes (Centre d'Economie de la Sorbonne - Paris School of Economics); François Gardes (Centre d'Economie de la Sorbonne - Paris School of Economics); Christophe Starzec (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: In this article, the size of informal economy is measured by using the full price method proposed by Gardes F. (2014). As an extension of this method, price elasticities are re-estimated by integrating the underreported earning shares both for wage workers and self-employers from cross-sectional data covering 2003-2006 in Turkey. The contribution of this paper is threefold: The size of informal economy is estimated by a statistical matching of the Turkish Family Budget and Time Use surveys through a complete demand system including full prices. Second, more accurate price and income elasticities are estimated by using the monetary incomes from informal activities for an emerging economy such as Turkey. Third, extended full price estimation of demand elasticities allow us to discover for which consumption group households are more likely to engage in informal work.
    Keywords: Informal economy, complete demand system, full prices, demand elasticity.
    JEL: E26 D1 D12 J22
    Date: 2014–12
  4. By: Pedro S. Martins
    Abstract: Several countries extend collective bargaining agreements to entire sectors, therefore binding non-subscriber workers and employers. These extensions may address coordination issues but may also distort competition by imposing sector-specifc minimum wages and other work conditions that are not appropriate for many firms. In this paper, we analyse the impact of such extensions along several margins drawing on firm-level monthly data for Portugal, a country where extensions have been widespread until recently. Drawing on the scattered timing of the extensions, we find that both formal employment and wage bills in the relevant sector fall, on average, by 2% - and by 25% more across small firms - over the four months after an extension is issued. These results are driven by both reduced hirings and increased firm closures. On the other hand, informal work, not subject to labour law or extensions, tends to increase. Our findings are robust to several checks, including a falsification exercise based on extensions that were announced but not implemented. JEL codes: J52, K31, J23
    Keywords: Collective agreements, worker flows, labour law
    Date: 2014
  5. By: Ceritoglu, Evren; Gurcihan Yunculer, H. Burcu; Torun, Huzeyfe; Tumen, Semih
    Abstract: Civil war in Syria, which started in March 2011, has led to a massive wave of forced immigration from the Northern Syria to the Southeastern regions of Turkey. This paper exploits this natural experiment to estimate the impact of Syrian refugees on the labor market outcomes of natives in Turkey. Using a difference-in-differences strategy, we find that immigration has considerably affected the employment outcomes of natives, while its impact on wage outcomes has been negligible. We document notable employment losses among informal workers as a consequence of refugee inflows. The majority of those who lost their informal jobs have either left the labor force or remained unemployed. Overall, unemployment rates have increased, while labor force participation, informal employment, and job finding rates have declined among natives. Disadvantaged groups -- i.e., females, younger workers, and less-educated workers|have been affected the worst. The prevalence of informal employment in the Turkish labor markets has amplified the negative impact of Syrian refugee inflows on natives' labor market outcomes.
    Keywords: Syrian civil war; immigration; Turkey; labor market; informality; difference in differences.
    JEL: C21 J15 J21 J61
    Date: 2015–01–21
  6. By: Besley, Timothy J.; Jensen, Anders; Persson, Torsten
    Abstract: This paper studies individual and social motives in tax evasion. We build a simple dynamic model that incorporates these motives and their interaction. The social motives underpin the role of norms and is the source of the dynamics that we study. Our empirical analysis exploits the adoption in 1990 of a poll tax to fund local government in the UK, which led to widespread evasion. We also exploit a series of natural experiments due to narrow election outcomes, which induce shifts into single-majority local governments and lead to more vigorous enforcement of local taxes. The econometric results are consistent with the model’s main predictions on the dynamics of evasion. “A widespread view among tax scholars holds that law enforcement does not explain why people pay taxes. The penalty for ordinary tax convictions is small; the probability of detection is trivial; so the expected sanction is small. Yet large numbers of Americans pay their taxes. ... Some scholars therefore conclude that the explanation for the tendency to pay taxes must be that people are obeying a norm — presumably a norm of tax payment or a more general norm of law-abiding behavior.” Posner (2000, page 1782)
    Keywords: poll tax; social norms; tax evasion
    JEL: H26 H71
    Date: 2015–01
  7. By: Salvador Balle (Universitat de les Illes Balears); Lucia Mangiavacchi (Universitat de les Illes Balears); Luca Piccoli (Universitat de les Illes Balears); Amedeo Spadaro (Universitat de les Illes Balears)
    Abstract: The present work studies optimal taxation of labour income when taxpayers are allowed to evade taxes. The analysis is conducted within a general non-linear tax framework, providing a characterisation of the solution for risk-neutral and risk-averse agents. For risk-neutral agents the optimal government choice is to enforce no evasion and to apply the original Mirrlees' rule for the optimal tax schedule. The no evasion condition is precisely determined by a combination of a sufficiently large penalty and a constant auditing probability. Similar results hold for risk-averse agents. Our findings imply that a government aiming at maximizing social welfare should always enforce no evasion and provide simple rules to pursue this objective.
    Keywords: Tax Evasion, Optimal Taxation, Social Welfare
    JEL: D31 H21 H26
    Date: 2015
  8. By: Yoshio Kamijo (School of Economics and Management, Kochi University of Technology); Takehito Masuda (Research Center for Social Design Engineering, Kochi University of Technology); Hiroshi Uemura (School of Economics and Management, Kochi University of Technology)
    Abstract: In this study, we employ a game theoretic framework to formulate and analyze tax audit schemes; we test the theoretical predictions in a laboratory experiment. We compare five audit schemes including three rule-based audits: random audit rule, cut-off audit rule, and lowest income reporter audited rule. The cut-off audit rule is theoretically optimal but, to the best of our knowledge, it has not been experimentally examined. We also employ a novel experimental design for two schemes involving the human auditor conditions. The rule-based audits experimentally enhance tax compliance as predicted, and cut-off yields the highest tax revenue among the three rule-based audits in the lab. Moreover, beyond our prediction, the human auditor conditions maximized tax revenue among the five schemes in the lab. This suggests that auditors’ strategic ambiguity is another route to enhance tax compliance. We also show that subjects’ social norms regarding tax payment influence the choice of tax evasion, in accordance with the experimental literature.
    Keywords: audit schemes, tax evasion, laboratory experiment, cut-off rule, lowest income reporter audited rule, ambiguity
    JEL: C91 D81 H26
    Date: 2015–01
  9. By: Céline Carrère; Christopher Grigoriou
    Abstract: Empirical studies on international trade extensively rely on the use of mirror trade statistics, i.e data reported by trading partners. However, while extensive reviews have been done on how to use mirror data to compensate poor quality data or to proxy transportation costs, very few has been done to see if and how the gap between the declared and mirrored disaggregated bilateral data could be used to capture informal cross border trade. Indeed, beyond the valid logistic reasons to explain why reported bilateral export flows from one country do not match the respective reported imports of its partner country, deliberate misreporting could significantly contribute to explain those discrepancies, either through misevaluation or misclassification of the imported goods, notably to evade tariffs and taxes. This paper proposes a review of the reasons for the gap between matched partner data, before investigating stylized facts from UN-COMTRADE data. Empirical analysis relying on econometrical panel data over a worldwide set of data at the 6 digits level evidences that discrepancies from the mirror data are not erratically driven. A statistically significant relationship between the gap and macroeconomic variables such bilateral distance, gdp per capita, average tariffs, foreign direct investments (FDI), implementation of regional trade agreements (RTA) have been evidenced. Based on these preliminary correlations, a probit has been run on orphan imports (imports reported by importing country without equivalent by exporting country) and predicts accurately up to 68 per cent of these misclassification cases. Thus, part of the gap can be predicted by macroeconomic variables, some of them suggesting a relationship between cross-border trade flows misreporting and fraud opportunities to evade tariffs and taxes.
    Date: 2014

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