nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒07‒09
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. A Review of critical issues on tax design and tax administration in a global economy and developing countries. By Mattéo Godin; Jean Hindriks
  2. Illicit Financial Flows: concepts and first macro estimates for Belgium and its 18 preferred partner countries. By Jozef Pacolet; Joris Vanormelingen
  3. Technology, Trade and ‘Urban Poor’ in a General Equilibrium Model with Segmented Domestic Factor Markets By Soumyatanu Mukherjee
  4. Human Capital and Labor Informality in Chile: A Life-Cycle Approach By Lopez Garcia, Italo
  5. Channelizing Afghanistan to Pakistan Informal Trade into Formal Channels By Adil Khan Miankhel
  6. Could mexico become the new ‘China'?: Policy drivers of competitiveness and productivity By Sean Dougherty; Octavio Escobar
  7. Peripheral Diversity: Transfers versus Public Goods By Desmet, Klaus; Ortuño-Ortín, Ignacio; Weber, Shlomo
  8. El proceso de formalización en el mercado laboral uruguayo By Amarante, Verónica; Gómez, Marcela
  9. Retos de la Economía Española: El Mercado de Trabajo By Angel de la Fuente

  1. By: Mattéo Godin (CRED, University of Namur); Jean Hindriks (CORE, Université Catholique de Louvain)
    Abstract: The mobilization of domestic tax resource has become a key issue for developing countries. In this report, we provide some facts and figures on the levels and structures of taxation around the world with special attention to Low Income Countries, (LICs). We use the new ICTD database covering 203 countries with 40 tax items over the period 1980-2010. We discuss some principles of tax design in a global economy that are relevant for LICs. We also review some critical issues on corruption and compliance to see how they relate to growth and tax evasion. We then provide a benchmark framework to assess the overall performance of the government tax collection. We use the tax effort index that measures the gap between the potential tax and the actual tax. The novelty of this tax effort index is twofold. First it takes into account spatial variables to capture the geographic dependence. Second it breaks down the tax effort analysis into different tax items to capture the possible tax shift. We conclude with a full ranking of tax effort for all countries and some suggestions of tax reform for a subset of countries that are targeted by the Belgian Development Cooperation.
    Keywords: Corporate taxation, efficient tax administration, tax enforcement, source-based and destination based taxation, origin and destination principles
    JEL: C72 H23 H70
    Date: 2015–06
  2. By: Jozef Pacolet (HIVA, KU Leuven); Joris Vanormelingen (HIVA, KU Leuven)
    Abstract: There is a growing awareness that illicit financial flows and the shadow economy might have a substantial impact on the financing of development. This paper provides a disentanglement of the definitions, sources and causes and measurement methodologies used and a first quantitative estimate for the 18 partner countries for development of Belgium. An overview of methodologies for defining the shadow economy, the informal economy, illicit financial flows and capital export has been provided, and based on those secondary sources a first macro estimate of their size has been provided for the 18 preferred partner countries for Belgian governmental development cooperation, together with some core macro-economic indicators. As a benchmark similar information is provided for the ‘Low Countries’ or Benelux. All those studies on the underground economy are in search of a ‘dark figure’ that risks to become, as some scholars call it, ‘facts by repetition’. More than 2 trillion euro undeclared economy in the EU, 1 trillion euro missed tax revenue in the same EU, they became officially quoted figures but they go back to the same, sometimes criticised source of information. Almost 1 trillion USD illicit financial flows worldwide is a similar fact that is cited over and over again. But it remains the best practical starting point to look for further evidence or understanding of those phenomena in the 18 partner countries. 46 billion USD illicit financial flows or 3.5% of their GDP are estimated for the 18 partner countries of Belgium (around 2012). 261 billion USD estimated underground economy or some 31.6% of GDP of those 18 countries (around 2007). Ten times more, as share of GDP. Both figures reveal the massive potential importance for financing of development.
    Keywords: illicit financial flows, financing for development
    JEL: F39
    Date: 2015–07
  3. By: Soumyatanu Mukherjee
    Abstract: Motivated by a set of stylised facts based on the provincial data for India, this paper, by utilising a four-sector general equilibrium framework with segmented labour and capital markets (domestic), proposes that factor-specific technological progress only in the capital-intensive segment of the urban formal sectors may affect the urban informal workers adversely, while a technological progress (trade-induced) in the vertically integrated skill-intensive formal sector benefits them. The quantitative analysis demonstrates that when both of the formal sectors undergo capital-using technological progress, urban informal wage may improve, provided the vertically integrated formal sector could save more on the capital cost of production compared to the relatively capital-intensive formal sector and capital flows to the informal sectors. This helps understand trends in urban poverty given the strong association between urban informal wage and the degree of urban poverty.
    Keywords: Technological Progress; Urban Informal Wage; General Equilibrium.
    Date: 2016
  4. By: Lopez Garcia, Italo
    Abstract: Labor informality accounts for nearly 40% of the labor force in Latin America. While a more traditional view sees this phenomenon as a consequence of barriers to mobility resulting from poorly designed labor regulations, recent work provides evidence that individuals choose informal jobs based on their comparative advantage. In this paper, I develop a dynamic life-cycle model estimated with rich Chilean longitudinal data, in which individuals jointly decide on their schooling and labor participation, to investigate the extent to which comparative advantage drives participation in informal labor markets. I find that human capital accumulation and preferences for job amenities explain up to 72% of transitions between the informal and the formal sector while labor market segmentation accounts for 28%. These barriers to mobility are decreasing in education. These results are largely driven by heterogeneous preferences and returns to skills across sectors. For example, more educated individuals assign a higher relative importance to non-wage benefits, particularly in formal jobs, while less educated individuals value more monetary rewards; high ability workers are more productive in the formal sector, while low ability workers are more productive in the informal sector; and unlike labor market experience acquired in informal activities, experience acquired in formal jobs is transferable across sectors. Finally, using the model to simulate the effects of a 20% wage subsidy in formal jobs for young workers, I find that individuals react to labor market expectations and their decisions are persistent. The subsidy would decrease the incentives to informality for both targeted groups and younger workers, while the reduction in informality rates as a consequence of the policy would remain persistent for all the life-cycle.
    Date: 2015–02
  5. By: Adil Khan Miankhel (Embassy of Pakistan)
    Abstract: Along with other routes, the Afghanistan-Pakistan Transit Trade Agreement (APTTA) is being used by informal traders for smuggling goods into Pakistan. Despite enforcement measures, smuggling continues. Informal traders import goods into Afghanistan, and then route those goods back to Pakistan through informal channels to take advantage from the arbitrage opportunity provided by the differences in applied tariff/taxes between the two countries. Therefore, in addition to strict enforcement measures, the issue of informal trade needs to be handled through incentive measures.
    JEL: F13 O24 O19
    Date: 2016–06
  6. By: Sean Dougherty; Octavio Escobar
    Abstract: Over the last decade, Mexico’s unit labour costs decreased relative to other emerging markets’, especially compared to China’s. This decrease boosted Mexico’s trade competitiveness, particularly in the manufacturing sector. However, Mexico’s increasing competitiveness masks one of the country’s fundamental concerns, which is the absence of productivity improvements. The aim of this paper is two-fold: first, we examine the evolution of total factor productivity in Mexico’s manufacturing sector, as compared to China’s. Firm-level data is employed to analyse the distribution and characteristics of productivity across Mexico’s regions. Second, using regional data for the period 2005–2012, we study the policy impediments behind sluggish productivity improvements, particularly to determine how labour informality may have contributed. The study takes advantage of Mexico’s heterogeneity across regions in terms of productivity, market regulation, financial constraints and firm size to identify economic policies that can help to boost productivity in the future. Le Mexique en phase de devenir la nouvelle Chine ? : Déterminants institutionnels de la compétitivité et de la productivité Au cours de la dernière décennie, les coûts unitaires du travail du Mexique ont diminué par rapport aux autres économies émergentes, en particulier par rapport à la Chine. Cette baisse a stimulé la compétitivité commerciale du Mexique, essentiellement dans le secteur manufacturier. Cependant, l’amélioration de la compétitivité semble masquer le principal problème mexicain, à savoir que cette dernière n’est pas accompagnée d’augmentation de la productivité. L’objectif de cet article est double: d'abord, nous examinons l'évolution de la productivité totale des facteurs dans le secteur manufacturier du Mexique, en comparaison avec la Chine. Les données utilisées sont recueillies au niveau des firmes, afin de pouvoir analyser la répartition et les caractéristiques de la productivité à travers les régions mexicaines. Deuxièmement, en utilisant les données régionales pour la période 2005–2012, nous étudions les obstacles politiques qui ont conduit à une stagnation de la productivité, en particulier pour déterminer dans quelle mesure l'informalité du travail pourrait y avoir contribué. Afin d’identifier les politiques économiques susceptibles de stimuler la productivité dans l'avenir, l'étude tire parti de l'hétérogénéité régionale en termes de productivité, du cadre réglementaire, des contraintes financières et de la taille des entreprises.
    Keywords: productivity, micro data, informality, allocative efficiency, sub-national policy analysis, productivité, micro-données, informalité
    JEL: E26 L25 O17 O43 O54
    Date: 2016–07–07
  7. By: Desmet, Klaus; Ortuño-Ortín, Ignacio; Weber, Shlomo
    Abstract: This paper advances the hypothesis that in societies that suffer from center-periphery tension it is harder to agree on public goods than on transfers. After micro-founding a new peripheral diversity index, it puts forth a simple theory in which the cost of public goods increases with peripheral diversity and tax compliance decreases with overall diversity. It then empirically explores the relation between public goods provision, transfers, peripheral diversity and overall diversity. Consistent with the theory, we find that higher levels of peripheral diversity are associated with less provision of public goods, but more transfers, whereas higher levels of overall diversity have a negative association with transfers. Public goods and transfers are therefore substitutes in their reaction to a change in peripheral diversity.
    JEL: H4 H5 Z10
    Date: 2016–06
  8. By: Amarante, Verónica; Gómez, Marcela
    Abstract: En un contexto favorable en términos macroeconómicos, el Uruguay ha experimentado en los últimos años una reducción significativa de su tasa de informalidad laboral, entendida como el no registro a la seguridad social de los trabajadores. En este artículo se analiza en detalle dicha evolución y sus posibles explicaciones, considerando el rol de las distintas políticas implementadas en el período, y los diferenciales de ingresos entre trabajadores formales e informales.
    Date: 2016–01
  9. By: Angel de la Fuente
    Abstract: El mercado de trabajo español se enfrenta a dos grandes problemas: un problema estructural que viene de atrás, ligado a una normativa y unas instituciones laborales muy rígidas y a un elevado grado de dualidad, y un problema, esperemos que transitorio pero con grave riesgo de enquistamiento, de una elevadísima tasa de paro de larga duración. En esta nota se discuten brevemente ambos problemas y lo que se ha hecho y/o se podría hacer para intentar solucionarlos o al menos mitigarlos.
    Date: 2016–06

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