nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2015‒12‒08
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality and Segmentation in the Mexican Labor Market By Alcaraz Carlo; Chiquiar Daniel; Salcedo Alejandrina
  2. Employment Formalization in Argentina: Recurring and New Challenges for Public Policies By Bertranou, Fabio; Casanova, Luis
  3. International Trade, Migration and Unemployment – The Role of Informal Sector By Marjit, Sugata; Mandal, Biswajit
  4. Heterogeneity and participation in Informal employment among non-cultivator workers in India By Sahoo, Bimal; Neog, Bhaskar Jyoti
  5. Informality in Non-Cultivation Labour market in India with Special Reference to North-East India By Neog, Bhaskar Jyoti; Sahoo, Bimal
  6. Study to quantify and analyse the VAT GAP in the EU member states By Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski
  8. Creación y Destrucción de Empleos e Informalidad By Céspedes, Nikita

  1. By: Alcaraz Carlo; Chiquiar Daniel; Salcedo Alejandrina
    Abstract: In developing countries, some workers have formal jobs while others are occupied in informal positions. One view regarding this duality suggests that sectors are segmented, which means that a worker in the informal sector identical to another in the formal sector cannot get a formal position due to entry barriers. A second view states that workers self-select into informal jobs. Previous research suggests that these two situations may coexist in the same labor market. In this paper we identify the proportion of informal workers who are in each situation for the case of Mexico. Using a simple model of self-selection with entry barriers into the formal sector, we estimate that between 10 and 20 percent of informal workers would prefer to have a formal job. While this result provides evidence of the presence of some segmentation in the Mexican labor market, it suggests that an important proportion of workers in the informal sector self-select into it.
    Keywords: Informality; Segmentation; Mexico; Labor Market.
    JEL: J42
    Date: 2015–12
  2. By: Bertranou, Fabio; Casanova, Luis
    Abstract: This article analyzes employment formalization in Argentina from 2003 to 2014 as well as the public policies associated with that process. It identifies the critical segments of informality along with the challenges they pose to a strategy aimed at reducing informality in a labor market that has proven relatively resistant to such reductions in recent years. The results show a decrease in informality for salaried employment, though there has not been a similar decrease among the self-employed. After a significant drop in non-registered salaried employment between 2003 and 2008, slower formal employment growth has offset advances in formalization. Informality affects nearly 44% of all employed individuals. The need to develop specific actions as part of a comprehensive strategy is due to the characteristics of the critical segments of the labor market and the persistence of a heterogeneous productive structure. It can also be attributed to a lower and more volatile rate of economic growth in recent years. In this context, the measures included in the "Law for the Promotion of Registered Employment and Labor Fraud Prevention” passed in 2014 are likely not only to improve working and employment conditions but also to increase productivity. However, in order for these tools to have a true impact on employment formalization, they must be accompanied by other productive, fiscal, social and labor policies, along with a macroeconomic framework that ensures stable economic growth.
    Keywords: informal employment, non-registered salaried employment, labor policies, Argentina
    JEL: J21 J48 J80
    Date: 2015–08
  3. By: Marjit, Sugata; Mandal, Biswajit
    Abstract: This paper provides an elaborate general equilibrium framework by including informal economic activities in a model of trade, migration and unemployment. Existence of informal activities is critical in generating positive employment effects of liberal trade policies. Following a tariff cut informal wage increases and rate of unemployment goes down under reasonable conditions. Next we generalize the benchmark model to capture the phenomenon of sequential migration: from agriculture to urban informal sector, and then to urban formal sector. The paper also extends the benchmark model to include both informal intermediate and final good.
    Keywords: International Trade; Employment; Informal Wage; General Equilibrium.
    JEL: D5 F1 J31 O17
    Date: 2015–02
  4. By: Sahoo, Bimal; Neog, Bhaskar Jyoti
    Abstract: Labour informality is one of the most serious challenges for the world and more so for developing economy like India with large scale poverty and little unemployment protection. The provision of decent working conditions becomes prerogative bringing the issue of labour informality into the forefront. This study scrutinized possible heterogeneity within informal employment among the non-cultivator workers in India. It has studied the trend, pattern, and determinants of the various components of the informal employment. It found significant heterogeneity within the informal employment with respect to poverty, age, gender, socio-religious communities, educational attainment, and industrial classification. . Complexity of heterogeneity in informal employment has been rising over time, hence posing serious policy challenges. Cluster analysis carried out to demonstrate the relationship between informality in employment and quality of works. The evidence suggests significant diversity within the informal employment. Multinominal logit was applied to determine the determinants of participation in informal employment. The result further reinforces the complexity in informal employment. The convolution is more with respect to rural and urban area, dependency ratio, marital status, social groups, and poverty. With respect to education the dual market hypothesis was supported. Co-existence of voluntary and involuntary informal employment was also observed. Given the diversity of employment, the paper suggests specific policy deign for different segment of employment to achieve eatable and inclusive growth.
    Keywords: Labour Market Informality, Quality of Work, Cluster Analysis, Heterogeneity, Multinomial Logit
    JEL: C35 C38 J80
    Date: 2015–10–01
  5. By: Neog, Bhaskar Jyoti; Sahoo, Bimal
    Abstract: Recent estimate of central statistics office for 2014-15 indicates that share of agriculture in GDP (market price) is about only 14.9 per cent, whereas it employs about 49.5 per cent of India’s total workforce. So moving out of agriculture is itself a desirable outcome for improving productivity in agriculture and also of the economy. But the question is “where will the workers of agriculture sector move to?” given the fact that Indian labour market is becoming more and more informal. Therefore, creation of decent jobs outside agriculture is one of the biggest challenges that confront policymakers. The present paper examines the trend and patterns of informal and formal employment in organised and unorganised non-agriculture sectors with special reference to North-East India. The paper, following National Commission for Enterprises in the Unorganized Sector (NCEUS) defined organised and unorganised sector by taking into account enterprise type and number of workers in enterprise. However, where both these information are missing, social security was taken as a yard stick to measure organised or unorganised sector. We applied logit regressions to find out what are the personal characteristics, household characteristics, and sectoral characteristics to determine the participation in informal sector, and examine whether these determinants are changing over time or not. The study is based on NSSO 2004-05 and 2011-12 employment and unemployment unit level data. The initial result suggests that in the non-agriculture sector, informal employment in unorganised sectors has declined from about 87 per cent to 85 per cent. Thereby it is suggesting, a rise in formal employment within non-cultivation sector. In addition, it is interesting to note that within informal employment in 2004-05 about 29 per cent are female but the corresponding figure for 2011-12 is about 24 per cent. This indicates that proportion of female participation in the informal economy has declined over the years. Similarly it is observed that informality for poorer household has declined for the study period. The logit regression result indicated that being a male reduced the odd of informality by more than 20 per cent in both the periods. Given the slow economic growth in the first half of the new millennium, married female labours were forced to join the informal sector; however, because of rising income in recent past they are not so keen to join the informal employment. Looking at the sectors, it is observed that, being a worker in construction sector and trade, hotel and transport sector increased the odd of joining informal sector many fold. This paper also examines these trends, patterns and determinants, with special reference to North-East region. Finally, the paper looks at the determinants of informality at the macro-level using panel data of the Indian states. The study finds a multitude of factors driving informality thereby implying that a multi-pronged strategy would be required to tackle the problem.
    Keywords: Labour, Informality, Manufacturing, Social Security, Gender
    JEL: C35 J80
    Date: 2015–09–01
  6. By: Luca Barbone; Mikhail Bonch-Osmolovskiy; Grzegorz Poniatowski
    Abstract: Only in 2013 the EU Member States lost approximately €168 billion in VAT revenues due to non-compliance, according to a recent study conducted by the Center for Social and Economic Research (CASE) for the European Commission. The report: “Study to Quantify and Analyse the VAT Gap in the EU Member States” examines the reasons for and reality of the VAT underperformance across twenty six Member States* . Compared to 2012, EU26 saw €2.8 billion increase in VAT-GAP in absolute numbers. Overall, 15 Member States decreased their VAT Gaps, with the largest improvements noted in Latvia, Malta, and Slovakia. However, at the same time 11 Member States saw an increase in the VAT Gap, with the largest deteriorations in Estonia and Italy. Emphasizing the diversity of the EU’s tax administrations, the study estimated that the VAT non-compliance in 2013 ranged from 4% in Finland, the Netherlands, and Sweden, to as much as 41% in Romania. “The overall underperformance was due to unfavorable economic environment, as the GDP of the European Union in 2013 was nearly stagnant.” – said Grzegorz Poniatowski, one of the report’s authors – “An increase in VAT gap in 2013 can also be explained by the increasing phenomenon of ‘missing trader frauds’ and carousel frauds”. The report also provides new and expanded evidence on the Policy Gap for the EU-26. The Policy Gap is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied standard rate to all consumption of goods and services supplied for consideration. The study shows that several Member States, including Belgium, Finland, France, Greece, Ireland, Luxembourg, Netherlands, Portugal, Spain, and the United Kingdom, could collect up to 50% more revenue if they applied a unified tax on all consumption.
    Keywords: Financial sector, Europe, VAT, finance, optimal taxation
    JEL: H20 H24 H25 H26 H62
    Date: 2015
  7. By: Shawn Chen (Business School, University of Western Australia)
    Abstract: How significantly, and through what mechanisms, can taxation be constrained by political incentives? Which factors can shape the local political incentives in institutions with multi-level governments? This paper uses the abolition of the agricultural tax in 2005 across China as a natural `fiscal squeeze' experiment to address these questions. I show that the revenue loss of county governments were largely and quickly offset by tougher tax enforcement. In particular, counties increased effective VAT rates without substantial changes in statutory VAT rates and changes in the reported tax base. This suggests that taxation capacity is not necessarily binding and constrained by access to information on tax base, as has been highlighted in many studies. There is a potentially large role for governments to endogenously determine on how aggressively to enforce the statutory taxes. The incentive for VAT enforcement can be weakened, however, if the county: (1) receives a lower proportion of total VAT revenues after sharing with prefectural and provincial governments; (2) has a broader VAT tax base; or, (3) has more abundant sources of revenue from land sales. These findings are consistent with a model of endogenous tax enforcement in presence of politicians' personal interests and tax competition in an institution of multi-level governments.
    Date: 2015
  8. By: Céspedes, Nikita (Ministerio de Economía y Finanzas del Perú)
    Abstract: En este documento se estudia la tasa de creación de empleo y la tasa de separación en Lima Metropolitana, el contexto de estudio es relevante al existir pocos estudios que caracterizan estos indicadores en economías informales y en desarrollo. Encontramos que estos indicadores del sector formal son en promedio similares a los estimados en economías desarrolladas; sin embargo, en el sector informal los valores calculados son aproximadamente tres veces mayores a los del sector formal. Existe una considerable heterogeneidad de las dos series según diversas variables observables; además, las dos variables están relacionadas con el ciclo económico: la tasa de separación es contracíclica y la tasa de encontrar empleo es procíclica, siendo esta ciclicidad mayor en el sector formal.
    Keywords: Creación de empleo, destrucción de empleo, ciclo económico, informalidad laboral, duración de desempleo, duración de empleo
    JEL: E24 E26 J63 J64 O17
    Date: 2015–11

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