nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒07‒30
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Productivity, Taxation and Evasion: A Quantitative Exploration of the Determinants of the Informal Economy By Di Nola, Alessandro; Kocharkov, Georgi; Vasilev, Aleksandar
  2. Job Creation in a Multi-Sector Labor Market Model for Developing Economies By Arnab K. Basu; Nancy H. Chau; Gary S. Fields; Ravi Kanbur
  3. How do regulated and unregulated labor markets respond to shocks? Evidence from immigrants during the Great Recession By Guriev, Sergei; Speciale, Biagio; Tuccio, Michele
  4. Immigration and Prices : Quasi-Experimental Evidence from Syrian Refugees in Turkey By Binnur Balkan Konuk; Semih Tumen
  5. An Analysis of Employment Dynamics in Korea: The Role of Temporary Work and Self-Employment By Taehyun Ahn
  6. Minimum Wage Effects on Labor Market Outcomes in Turkey By Hatice Burcu Gurcihan Yunculer; Caglar Yunculer
  7. Social networks and informal financial inclusion By Chai, Shijun; Chen, Yang; Huang, Bihong; Ye, Dezhu
  8. Does a Ban on Informal Health Providers Save Lives? Evidence from Malawi By Godlonton, Susan; Okeke, Edward N.

  1. By: Di Nola, Alessandro; Kocharkov, Georgi; Vasilev, Aleksandar
    Abstract: This paper evaluates the relative importance of labor productivity vs. income taxes and social security contributions for tax compliance in an economy with a large degree of informality. To this end, we build a bargaining model in which matched employer-employee pairs of heterogeneous productive capacities make decisions on output sharing and the degree of tax evasion. The quantitative model takes as inputs the income tax structure and the estimated aggregate productivity series. The estimation strategy recovers the bargaining parameters and the cost function of tax evasion in the model by matching the empirical series for the size of the informal sector (2000-2014). The results from the performed computational experiments point out that the most important factor is labor productivity, followed by the corporate tax. Income tax progressivity in Bulgaria is found not to be quantitatively relevant for tax evasion.
    Keywords: informal economy,tax evasion
    JEL: H24 H25
    Date: 2016
  2. By: Arnab K. Basu (Cornell University); Nancy H. Chau (Cornell University and Centro Studi Luca d’Agliano); Gary S. Fields (Cornell University); Ravi Kanbur (Cornell University)
    Abstract: This paper proposes an overlapping generations multi†sector model of the labor market for developing countries with three heterogeneities – heterogeneity within self†employment, heterogeneity in ability, and heterogeneity in age. We revisit an iconic paradox in a class of multi†sector labor market models in which the creation of high†age employment exacerbates unemployment. Our richer setting allows for generational differences in the motivations for job search to be reflected in two distinct inverted U†shaped relationships between unemployment and high†wage employment, one for Youth and a different one for adults. In turn, the relationship between overall unemployment and high†wage employment is shown to be non†monotonic and multi†peaked.  The model also sheds light on the implications of increasing high†wage employment on self†employed workers, who make up most of the world’s poor. Non†monotonicity in unemployment notwithstanding, increasing high†wage employment has an unambiguous positive impact on high†paying self†employment, and an unambiguous negative impact on free†entry (low†wage) self†employment.
    Keywords: Multisector Labor Market, Overlapping Generations, Poverty Reduction, Harris†Todaro Model
    JEL: O17 I32
    Date: 2016–06–01
  3. By: Guriev, Sergei; Speciale, Biagio; Tuccio, Michele
    Abstract: We study wage adjustment during the recent crisis in regulated and unregulated labor markets in Italy. Using a unique dataset on immigrant workers, we show that before the crisis wages in the formal and informal sectors moved in parallel (with a 15 percent premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32 percent. The difference was particularly salient for workers in "simple" occupations where there is high substitutability between immigrant and native workers. Calibrating a simple model of spillovers between formal and informal markets, we find that less than 10 percent of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5-4.5 percent - much lower than 16 percent decline that we observe in the data.
    Keywords: great recession; Immigration; Labor market regulation; wage rigidity
    JEL: E24 J31 J61
    Date: 2016–07
  4. By: Binnur Balkan Konuk; Semih Tumen
    Abstract: We exploit the regional variation in the unexpected (or forced) inflow of Syrian refugees as a natural experiment to estimate the impact of immigration on consumer prices in Turkey. Using a difference-in-differences strategy and a comprehensive data set on the regional prices of CPI items, we find that general level of consumer prices has declined by approximately 2.5 percent due to immigration. Prices of goods and services have declined in similar magnitudes. We highlight that the channel through which the price declines take place is the informal labor market. Syrian refugees supply inexpensive informal labor and, thus, substitute the informal native workers especially in informal labor intensive sectors. We document that prices in these sectors have fallen by around 4 percent, while the prices in the formal labor intensive sectors have almost remained unchanged. Increase in the supply of informal immigrant workers generates labor cost advantages and keeps prices lower in the informal labor intensive sectors.
    Keywords: Immigration, Consumer prices, Syrian refugees, Natural experiment, Informal employment
    JEL: C21 E31 J46 J61
    Date: 2016
  5. By: Taehyun Ahn (Department of Economics, Sogang University, Seoul)
    Abstract: In this study, I investigate dynamic employment choice among prime-age men and women using panel data from South Korea, with particular focus on temporary work and self-employment. Using a dynamic multinomial logit model with a factor-analytic random-effects specification, I find that temporary employment rarely serves as a stepping stone toward permanent employment. However, the estimates reveals some positive aspects of self-employment by indicating that individuals who were self-employed in the previous year are less likely than those who were in any other employment status to be nonemployed in the future.
    Keywords: Self-Employment; Temporary Employment; Self-Employment; State Dependence JEL classification codes: C23, C25, J20
    Date: 2016–07
  6. By: Hatice Burcu Gurcihan Yunculer; Caglar Yunculer
    Abstract: This paper estimates the impact of minimum wages on the labor market outcomes in Turkey using the sizable minimum wage increase in 2004. Utilizing a quasi-experimental approach we provide new evidence from a developing country where the minimum wage is binding to a great extent. The increase took place in a period of strong economic growth and cost to the employer was partially subsidized by the government. Our results suggest that minimum wage increase of 2004 compressed the wage distribution from below. Using degree of impact measures we estimate that a 1 percent surge in the minimum wage increased wages by an extra 0.22-0.35 percent. Wage response was lower for informally working, low educated and young employees. Higher minimum wage was accompanied by an increase in the likelihood of informal employment. The minimum wage increase did raise working hours, suggesting that firms may have tried to offset part of the increase in the labor cost by increasing employment at the intensive margin. Estimations do not point out to an adverse impact for the overall employment. But due to data limitations results on employment are less robust. Furthermore, looking at the impact of minimum wages on the formal and informal divide, our results do not support the predictions of the dual market hypothesis on wages. We observe wage increase not only for the formal but also for the informal employees pointing out to the presence of a "lighthouse" effect previously documented for some other developing countries.
    Keywords: Minimum wage, Turkey, Difference in differences, Informality
    JEL: J31 J42 R23
    Date: 2016
  7. By: Chai, Shijun (School of Economics, Xinyang Normal University); Chen, Yang (Division of Economics, Xi'an Jiaotong-Liverpool University); Huang, Bihong (Asian Development Bank Institute); Ye, Dezhu (School of Economics, Jinan University)
    Abstract: Using the 2011 China Household Finance Survey (CHFS) database, this article explores the heterogeneous impacts of social networks on informal financial inclusion for rural and urban households and identifies two mechanisms through which the informal institution changes households’ financial market decisions. The IV-Probit and IV-Tobit estimation results indicate that social networks significantly increase the probability of the household’s informal financial market participation, the size of informal lending and financing and the ratio of informal lending over the total household assets. By reducing risk aversion and the precautionary saving, we find social networks play a larger role in the urban area of China compared to the rural counterpart. And notably, the effects of informal institution, shaped by various cultural factors and kinships, remain strong and persistent even with formal institutions being firmly established.
    Keywords: Social Networks, Informal financial inclusion, Risk attitude, Precautionary saving, Formal institutions
    JEL: G21 O16 P34 Z13
    Date: 2016–07–08
  8. By: Godlonton, Susan; Okeke, Edward N.
    Abstract: Informal health providers ranging from drug vendors to traditional healers account for a large fraction of health care provision in developing countries. They are, however, largely unlicensed and unregulated leading to concern that they provide ineffective and, in some cases, even harmful care. A new and controversial policy tool that has been proposed to alter household health seeking behavior is an outright ban on these informal providers. The theoretical effects of such a ban are ambiguous. In this paper, we study the effect of a ban on informal (traditional) birth attendants imposed by the Malawi government in 2007. To measure the effect of the ban, we use a difference-in-difference strategy exploiting variation across time and space in the intensity of exposure to the ban. Our most conservative estimates suggest that the ban decreased use of traditional attendants by about 15 percentage points. Approximately three quarters of this decline can be attributed to an increase in use of the formal sector and the remainder is accounted for by an increase in relative/friend-attended births. Despite the rather large shift from the informal to the formal sector, we do not find any evidence of a statistically significant reduction in newborn mortality on average. The results are robust to a triple difference specification using young children as a control group. We examine several explanations for this result and find evidence consistent with quality of formal care acting as a constraint on improvements in newborn health.
    Keywords: informal health providers, government bans, child mortality
    JEL: I12 I15 O15
    Date: 2015–06

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