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on Informal and Underground Economics |
| By: | Clement, Christine |
| Abstract: | Central to the scientific debate about the 'informal sector' and the validity of the concept used to be a twofold challenge. The crux laid not only in the objective to explain the widely visible persistence of the informal economy in developing countries, but also in the identification of its roots and the proliferation conditions to be met ex ante. The present paper aims at establishing a link between the theories on informality and marginalization which is another important issue that has arisen within the discussions on the causes of persistent poverty a few years ago. Both concepts are interlinked and self-enforcing. On the macroeconomic level, any economy - be it formal or informal - consists of a set of different economic sectors and any of these sectors basically consists of an accumulation of people on the microeconomic level. Every time one looks at the macro level where political and economic conditions frame the dynamics of the formal and the informal economy, one has at the same time to look at the micro-level where the social and economic conditions determine the incentives for every actor to participate either in the formal, the informal or in both economies. Informality has multiple sources depending on whether the agent took a voluntary choice or had to involuntary opt-out from an institutional system. In this paper, the connection between informality and involuntary exclusion shall be examined in a retrospective of economic thought since the 1940s. The roots of the intertwined concepts of informality and economic exclusion have been laid in the dual economy theories of the 1940s-1950s. Recapitulating the works of Julius BOEKE, Arthur LEWIS, John HARRIS & Michael TODARO, Albert HIRSCHMAN and other socio-economists of that time, it will be argued that one of the necessary reasons for the persistence of the informal economy in developing countries is the dualism in institutional frameworks that leads to the marginalization of social groups and their subsequent exclusion from formal economic activities. By referring to the groundbreaking Africa studies of Keith HART (1971) and the INTERNATIONAL LABOUR ORGANIZATION (1972), special emphasis will be given to the causal reciprocity between informality, marginalization and economic exclusion. The paper closes with a brief overview of current schools of thought that deal very differently with the issue of informality and economic exclusion. |
| Keywords: | economic dualism,informal sector,informal economy,informality,marginalization,economic exclusion,involuntary exclusion,institutions,inequality,traditional sector,urban rural sector,stages of development,Julius Boeke |
| JEL: | B20 B25 J64 O15 O17 O43 N90 P16 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:hohpro:432015&r=iue |
| By: | Catalina Granda (Universidad de Antioquia); Franz Hamann (Banco de la República de Colombia) |
| Abstract: | The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. In this paper, we aim to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, we build an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments further allow us to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered. Classification JEL: E21, E26, O17 |
| Keywords: | informality, wealth inequality, saving, occupational choice models. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:873&r=iue |
| By: | Catalina Granda; Franz Hamann |
| Abstract: | The informal sector is an extensive phenomenon in developing countries. While some of its implications have drawn considerable attention in the literature, one relatively unexplored aspect has to do with the saving patterns of workers and firms and how these might influence aggregate savings and wealth inequality. In this paper, we aim to fill that gap by examining both entrepreneurs' and workers' choices regarding whether to perform informally and regarding asset accumulation. Specifically, we build an occupational choice model wherein saving is primarily motivated by precautionary considerations. The model features labor and capital market segmentation, and is calibrated to replicate the saving rates, wealth inequality and composition of occupations across the formal and informal sectors of Colombia. Computational experiments further allow us to analyze the effects of highly debated formalization policies on wealth redistribution and promotion of saving and entrepreneurship. Alternative frameworks are finally considered. |
| Keywords: | Informality, wealth inequality, saving, occupational choice models. |
| JEL: | E21 E26 O17 |
| Date: | 2015–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012621&r=iue |
| By: | Tumen, Semih |
| Abstract: | Informal jobs offer skill acquisition opportunities that may facilitate a future switch to formal employment for young workers. In this sense, informal training on the job may be a viable alternative to formal schooling in an economy with a large and diverse informal sector. In this paper, I investigate if these considerations are relevant for the schooling decisions of young individuals using panel data on 17 Latin American countries as well as micro-level data for Turkey. Specifically, I ask if the prevalence of informal jobs distort schooling attainment. I concentrate on three measures of schooling outcomes: (1) secondary education enrollment rate, (2) out-of-school rate for lower secondary school, and (3) tertiary education graduation rate. I find that the secondary education enrollment rate is negatively correlated with the size of the informal economy, while the out-of-school rate is positively correlated. This means that informal training on the job may be crowding out school education in developing countries. The tertiary education graduation rate, however, is positively correlated with the size of informal sector, which implies that a large informal economy induces college attendance for those who are more likely to succeed. Policies that can potentially affect the size of the informal sector should take into consideration these second-round effects on aggregate schooling outcomes. |
| Keywords: | Informal economy; skill acquisition; schooling outcomes; Latin America; Turkey. |
| JEL: | E26 I21 J24 O17 |
| Date: | 2015–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62909&r=iue |
| By: | Deidda, Manuela (University of Cagliari); Di Liberto, Adriana (University of Cagliari); Foddi, Marta (University of Cagliari); Sulis, Giovanni (University of Cagliari) |
| Abstract: | We analyze the effects of an ALMP for disadvantaged workers implemented in a depressed area of Italy. Using propensity-score matching, we find that a) the employment subsidy had a positive effect for participants on both the probability of finding a job and income, b) the outcome of the policy was more positive for women, and c) the program was more effective for older and less-educated female workers. Using data on previous contacts between workers and firms and on informal channels for job search activity, we ultimately explore the role of the program in promoting the transition from informal to salaried employment. |
| Keywords: | employment subsidies, female labor-force participation, evaluation, informal economy |
| JEL: | C14 C83 J64 J16 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8886&r=iue |
| By: | Susan Namirembe Kavuma; Oliver Morrissey; Richard Upward |
| Abstract: | The paper examines the flow of workers between employment states, the role of education in these transitions and the impact of the transitions on earnings. It uses panel data for three waves (2005/06, 2009/10 and 2010/11) of household surveys in Uganda. We estimate transition probability matrices and find bi-directional transitions between formal and informal employment but with a higher tendency of workers to transition from formal to informal than in the opposite direction. When we investigate the relation between education and transitions using probit models, we find the transition from informal to formal increases with education but the movement from formal to informal employment and switching from not working to working declines with education. We further investigate the impact of the transitions on the worker’s welfare by estimating wage equations and find evidence for a decline in monthly wages for workers moving from formal to informal employment and a wage gain for workers moving in the reverse direction. We suggest that transitions from informal to formal employment are induced by higher wage offers, while transitions in the opposite direction are more likely to be due to losing a job. |
| Keywords: | formal and informal sector employment, labour transitions JEL Classifications: J23, J40, O17, O55, |
| URL: | http://d.repec.org/n?u=RePEc:not:notcre:15/01&r=iue |
| By: | Chakraborty, Tanika (Indian Institute of Technology Kanpur); Mukherjee, Anirban (University of Calcutta); Saha, Sarani (Indian Institute of Technology Kanpur) |
| Abstract: | In this paper we theoretically and empirically examine how the interaction between the formal court system and the informal loan network affects a household's decision to start a business. We find that when the formal court system is weak, expansion of informal credit network leads to the proliferation of business. However, with a sufficiently strong court system, expansion of credit network has a negative effect on business prospects. This result is explained by the contradictions between formal laws and norms used by informal networks. Our result remains robust after controlling for a variety of household and district level characteristics. |
| Keywords: | informal network, court, formal institution, entrepreneurship |
| JEL: | K12 L26 O17 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8887&r=iue |
| By: | Antón Arturo; Leal-Ordoñez Julio C. |
| Abstract: | In a typical developing country, coverage of the contributory social security system is low. We analyze the aggregate effects of a revenue-neutral fiscal-cum-social policy reform that consists of: 1) the implementation of universal social insurance to replace the system with low coverage; and 2) the elimination of the social security payroll tax to replace it with a generalized VAT. We find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices. Thus, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, the reform could affect some groups in the population, given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers. |
| Keywords: | Universal Social Insurance;Fiscal Reform;Inequality;VAT;Allocation of Resources across Firms and Sectors. |
| JEL: | E62 H55 O17 O47 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2015-04&r=iue |
| By: | Antonio Lecuna (School of Business and Economics, Universidad del Desarrollo) |
| Abstract: | Statistical tests on a panel of data from 54 countries over the 2004–2009 period support the proposition that high income inequality and entrepreneurial activity share a positive linear relationship. In a novel approach, the dependent variable is defined from two independent and uncorrelated perspectives: (1) the World Bank Group Entrepreneurship Snapshot, which measures new business entry density based on secondary official sources; and (2) the Total Early Stage Entrepreneurial Activity of the Global Entrepreneurship Monitor project, which is a survey-based measure of formal and informal entrepreneurial participation rates. The empirical strategy is based on the logic that economies with increasing concentrations of wealth tend to encourage entrepreneurial activity because entrepreneurs accumulate more income than workers. Following the disequalizing model, once this inequality appears, it is reinforced in successive generations. The intuition behind this outcome is that a certain level of initial capital is required to establish a new enterprise, which implies that the probability of becoming an entrepreneur increases if an individual has inherited wealth. |
| Keywords: | Entrepreneurship, income inequality, institutions, public policy. |
| JEL: | L26 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:dsr:pastwp:08&r=iue |
| By: | Aizenman, Joshua; Cavallo, Eduardo; Noy, Ilan |
| Abstract: | Why do people save? A strand of the literature has emphasized the role of ‘precautionary’ motives; i.e., private agents save in order to mitigate unexpected future income shocks. An implication is that in countries faced with more macroeconomic volatility and risk, private saving should be higher. From the observable data, however, we find a negative correlation between risk and private saving in cross-country comparisons, particularly in developing countries. We provide a plausible explanation for the disconnect between precautionary-saving theory and the empirical evidence that is based on a model with a richer account for the various modes of ‘precautionary’ behavior by private agents, in cases where institutions are weaker and labor informality is prevalent. In such environments, household saving decisions are intertwined with firms’ investment decisions. As a result, the interaction between saving behavior, broadly construed, and aggregate risk and uncertainty, may be more complex than is frequently assumed. |
| Keywords: | Precautionary savings, Macroeconomic risks, Informality, Family firms, |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:4198&r=iue |
| By: | Joshua Aizenman; Eduardo Cavallo; Ilan Noy |
| Abstract: | Why do people save? A strand of the literature has emphasized the role of ‘precautionary’ motives; i.e., private agents save in order to mitigate unexpected future income shocks. An implication is that in countries faced with more macroeconomic volatility and risk, private saving should be higher. From the observable data, however, we find a negative correlation between risk and private saving in cross-country comparisons, particularly in developing countries. We provide a plausible explanation for the disconnect between precautionary-saving theory and the empirical evidence that is based on a model with a richer account for the various modes of ‘precautionary’ behavior by private agents, in cases where institutions are weaker and labor informality is prevalent. In such environments, household saving decisions are intertwined with firms’ investment decisions. As a result, the interaction between saving behavior, broadly construed, and aggregate risk and uncertainty, may be more complex than is frequently assumed. |
| JEL: | E21 E26 F36 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21019&r=iue |
| By: | Charpe, Matthieu; Flaschel, Peter; Hartmann, Florian; Malikane, Christopher |
| Abstract: | The paper builds on the Goodwin (1967) model which describes the distributive cycle of capitalist economies whereby mass unemployment is generated periodically through the conflict about income distribution between capital and labor. We add to this model a segmented labor market structure with fluid, latent, and stagnant components. The model exhibits a unique balanced growth path which depends on the speeds with which workers are pushed into or out of the labor market segments. We investigate the stability properties of this growth path with segmented labor markets and find that, though there is a stabilizing inflation barrier term in the wage Phillips curve, the interaction with the latent and stagnant portions of the labor market generates potentially (slowly) destabilizing forces if policy measures are absent that regulate these labor markets. We then introduce an activating labor market policy, where government in addition acts as employer of last resort thereby eliminating the stagnant portion of the labor market, whilst erecting benefit systems that partially sustain the incomes of workers that have to leave the floating/latent labor market of the private sector of the economy. We show that such policies guarantee the macrostability of the economy’s balanced growth path. |
| Keywords: | distributive cycle; Goodwin model; segmented labor markets; active labor market policy; macroeconomic stability; employer of last resort |
| JEL: | E32 E64 H53 J38 |
| Date: | 2014–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62832&r=iue |
| By: | Soumyatanu Mukherjee; Sameen Zafar |
| Abstract: | Motivated by a set of stylised facts based on provincial data for India, this paper investigates the incidence of urban poverty by modelling the impact of technological progress in the formal sectors of the economy on the urban informal wage in a four-sector general equilibrium framework with labour and capital market distortions. Uniform technological progress only in the capital intensive segment of the formal sectors affects the urban informal workers adversely, whereas productivity improvement only in the less capital intensive sector benefits them. The sensitivity analysis demonstrates that when both formal sectors undergo uniform technological progress at the same rate, informal wage may improve if the vertically integrated sector is less capital intensive (as capital flows to the informal sectors). This helps in understanding trends in urban poverty given the strong association between the urban informal wage and degree of urban poverty. |
| Keywords: | Poverty; Technological Progress; Informal Wage; General Equilibrium. JEL Classifications: E26; F11; F16; J46; I32; O17 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcre:15/02&r=iue |
| By: | Soldatos, Gerasimos T. |
| Abstract: | High taxation is found to lead not to less labor supply but to more tax evasion and/or black labor. Investigating next what this implies for the course of the tax revenue and subsequently for the shape of the Laffer curve, this curve is found to change with the tax induced change of taxpayer preferences over tax compliance and tax aversion. Hence, the relevant Laffer curve when contemplating tax cuts should be the one after the last tax increase and cannot thereby be fully self-financed. |
| Keywords: | Laffer curve, Tax evasion/black labor, Self-financing tax cuts |
| JEL: | E62 H26 J22 |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62470&r=iue |
| By: | Romeu, Andrés; Martinez-Sanchez, Francisco (Fundamentos del Análisis Económico) |
| Abstract: | In this paper, we analyze the differences in piracy rates from one country to another. Like previous papers on the topic, we find that more developed countries have lower incentives for pirating. Unlike previous papers, we find that the piracy rate is positively correlated with the tax burden rate but negatively correlated with the domestic market size and exports over GDP. We also separate the impacts of education and R&D on piracy, and find two effects with opposite signs. Moreover, we find that those countries with smaller, more efficient bureaucracies are likely to protect intellectual property more effectively. Finally, we show that the spread of access to the Internet is negatively correlated with the software piracy rate. |
| Keywords: | piracy rate, education, R&D, quality bureaucracies, intellectual property, Internet |
| JEL: | D12 R23 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:mur:wpaper:43702&r=iue |
| By: | Jaramillo, Miguel (Grupo de Análisis para el Desarrollo (GRADE)); Sparrow, Bárbara (Grupo de Análisis para el Desarrollo (GRADE)) |
| Abstract: | La división entre empleo formal e informal es una característica notable del mercado laboral peruano. Las políticas implementadas para reducir el tamaño de la informalidad laboral, como la expansión del régimen para las microempresas y pequeñas empresas, no han tenido un efecto significativo. Este estudio indaga sobre los efectos del largo ciclo de expansión del empleo y de los ingresos en la última década. A través de datos de la ENAHO 2001-2010, se identifica de qué manera el desempeño del mercado laboral, las instituciones y las políticas han afectado la segmentación del mercado laboral durante este periodo. Además, se documenta el significado de la dualidad formal/informal en términos de indicadores de calidad del empleo. Los hallazgos muestran que, a pesar de un contexto demográfico exigente, el mercado laboral peruano ha logrado un desempeño positivo gracias a que el crecimiento del empleo ha superado el de la fuerza laboral, lo que ha producido una disminución de las tasas de desempleo y subempleo, así como mejoras en diversos indicadores de calidad del trabajo. Ello ha hecho posible una modesta reducción en el tamaño del sector informal y ha incrementado la movilidad del empleo informal al formal. Sin embargo, la segmentación sigue siendo una característica notable del mercado laboral peruano, debido a que el empleo en las microempresas continúa creciendo, aunque no a la misma velocidad que en las grandes empresas. El acceso a la seguridad social también dista mucho de ser el ideal. Por otro lado, ha habido un rápido crecimiento de los contratos a plazo fijo. Estos resultados sugieren que el dinamismo positivo del mercado laboral es insuficiente para reducir la informalidad en un plazo razonable. |
| Keywords: | Abuso de menores, Maltrato a menores, Violencia, Niños, Problemas sociales, Perú, Child abuse, Violence, Children, Social problems, Peru |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gad:doctra:dt72&r=iue |
| By: | Del Carpio, Lucía (Grupo de Análisis para el Desarrollo (GRADE)) |
| Abstract: | El cumplimiento con el pago de impuestos genera muchas interrogantes. Sin embargo, aún es escasa la evidencia sobre cómo interactúan las múltiples motivaciones para cumplir con el pago —intrínsecas y extrínsecas— en presencia de diferentes escenarios institucionales y si se generan “normas sociales” a raíz de estas. La presente investigación estudia el rol de las normas sociales en las decisiones de evasión de impuestos a través de un experimento de campo realizado con el impuesto predial en el Perú. El estudio revela una respuesta compleja a la información sobre las llamadas “normas sociales” que actúan modificando las percepciones sobre el nivel de cumplimiento, pero también la percepción sobre el nivel de sanción. De manera más general, se encuentra que las políticas para ejercer presión (nudge) pueden tener efectos amplios, en particular los recordatorios de pago simples. Además, se observa que puede transmitirse información relevante de manera creíble a los contribuyentes y que ellos reaccionan ante esta información, lo que brinda a las autoridades tributarias oportunidades interesantes para expandir su ámbito en materia de política. |
| Keywords: | Impuestos, Normas Sociales, Taxes, Social norms, Peru |
| JEL: | H2 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gad:doctra:dt73&r=iue |