nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒11‒07
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Growth Performance of the Turkish Economy: The Role of the Informal Sector By Ceyhun Elgin; Oguz Oztunalı
  2. Firm-Size Wage Gaps along the Formal-Informal Divide: Theory and Evidence By Balkan, Binnur; Tumen, Semih
  3. Employment in a time of high growth in India By Ghose, Ajit K
  4. Rosca Meets Formal Credit Market By Hanming Fang; Rongzhu Ke; Li-An Zhou

  1. By: Ceyhun Elgin (Bogazici University, Economics); Oguz Oztunalı (Bogazici University, Economics)
    Abstract: The presence of informality and its connection with economic growth has been a contentious issue on which the current literature has failed to generate a consensus. In this study, first, we investigate the growth performance of the Turkish economy through the lenses of a simple growth accounting exercise. Moreover, we also extend the growth accounting framework to account for the presence of an informal sector and give emphasis on how the presence of a relatively large informal sector in Turkey (about 28 % of GDP, according to recent estimates) affects growth of the official economy as well as its determinants.
    Keywords: Economic Growth, Growth Accounting, Turkish Economy, Informal Sector
    JEL: E26 O17 O47
    Date: 2015
  2. By: Balkan, Binnur (Central Bank of Turkey); Tumen, Semih (Central Bank of Turkey)
    Abstract: Observationally equivalent workers are paid higher wages in larger firms. This fact is often named as the "firm-size wage gap" and is regarded as a key empirical puzzle. Using micro-level data from Turkey, we document a new stylized fact: the firm-size wage gap is more pronounced for informal (unregistered) jobs than for formal (registered) jobs. To explain this fact, we develop a two-stage wage-posting game with market imperfections and segmented markets, the solution to which produces wages as a function of firm size in a well-defined subgame-perfect equilibrium. The model proposes two explanations. First, taxes on formal employment generate a wedge between formal and informal size wage gaps. Thus, government policy can potentially affect the magnitude of the firm-size wage gaps. The second explanation features a market-based framework with strategic interactions. Relative to small firms, large firms typically post higher wages for both formal and informal jobs they open. A high-wage formal job attracts a larger pool of applicants than a high-wage informal job. The larger pool of applicants for the formal job, in turn, allows the firm to somewhat lower the initial wage offer, while this second-round effect is negligible for informal jobs. As a result, size differentials are lower in formal jobs than informal jobs. We argue that the observed patterns in the use of social connections in job search and heterogeneity in job preferences can be used to justify the validity of this second mechanism.
    Keywords: subgame perfection, wage posting, informal job, wage gap, firm size, taxes, social networks
    JEL: C78 J21 J31 L11
    Date: 2015–10
  3. By: Ghose, Ajit K
    Abstract: This paper attempts to do precisely that. It does so by first setting up the analytical foundations of a dual economy framework that is applicable to India; and then developing appropriate indicators out of national survey data to examine this change. In the course of discussion we get a clear economy wide picture of relevant employment categories with which to assess changes, including formal and regular employment, underemployment and informality.
    Keywords: employment, economic growth, labour force, dual economy, trend, India, emploi, croissance économique, main-d'oeuvre, dualisme économique, tendance, Inde, empleo, crecimiento económico, mano de obra, dualismo económico, tendencia, India
    Date: 2015
  4. By: Hanming Fang; Rongzhu Ke; Li-An Zhou
    Abstract: Rotating Savings and Credit Association (Rosca) is an important informal financial institution in many parts of the world used by participants to share income risks. What is the role of Rosca when formal credit market is introduced? We develop a model in which risk-averse participants attempt to hedge against their private income shocks with access to both Rosca and the formal credit and investigate their interactions. Using the gap of the borrowing and saving interest rates as a measure of the imperfectness of the credit market, we compare three cases: (i) Rosca without credit market; (ii) Rosca with a perfect credit market; (iii) Rosca with an imperfect credit market. We show that a perfect credit market completely crowds out the role of Rosca. However, when credit market is present but imperfect, we show that Rosca and the formal credit market can complement each other in improving social welfare. Interestingly, we find that the social welfare in an environment with both Rosca and formal credit market does not necessarily increase monotonically as the imperfectness of the credit market converges to zero.
    JEL: D44 G21 O16 O17
    Date: 2015–10

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