nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒09‒18
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Anatomy of Behavioral Responses to Social Assistance When Informal Employment Is High By Bergolo, Marcelo; Cruces, Guillermo
  2. Informal Labor and the Efficiency Cost of Social Programs: Evidence from the Brazilian Unemployment Insurance Program By François Gerard; Gustavo Gonzaga
  3. Opening the Pandora's Box – Liberalised Input Trade and Wage Inequality with Non-traded Goods and Segmented Unskilled Labour Markets By Soumyatanu Mukherjee
  4. A Detailed Description of OGRE, the OLG Model By Daniel Baksa; Zsuzsa Munkacsi
  5. Tax evasion, firm dynamics and growth By Emmanuele Bobbio
  6. Misreporting Trade: Tariff Evasion, Corruption, and Auditing Standards By Derek Kellenberg; Arik Levinson
  7. Aging, (Pension) Reforms and the Shadow Economy in Southern Europe By Daniel Baksa; Zsuzsa Munkacsi
  8. Determinantes del acceso al crédito formal e informal: Evidencia de los hogares de ingresos medios y bajos en Colombia By Ana María Iregui-Bohórquez; Ligia Alba Melo-Becerra; María Teresa Ramírez-Giraldo; Ana María Tribín-Uribe

  1. By: Bergolo, Marcelo (IECON, Universidad de la República); Cruces, Guillermo (CEDLAS-UNLP)
    Abstract: The disincentive effects of social assistance programs on registered employment are a first order policy concern in developing countries. Means tests determine eligibility with respect to some income threshold, and governments can only verify earnings from registered employment. The loss of benefit at some level of formal earnings is an implicit tax that results in a strong disincentive for formal employment. We study an income-tested program in Uruguay and extend previous literature by developing an anatomy of the behavioral responses to this program. Our identification strategy is based on a sharp discontinuity in the program's eligibility rule and uses information from the program's records, social security administration data, and a follow-up survey. First, we establish that beneficiaries respond to the program's incentives by reducing their levels of registered employment by about 8 percentage points. Second, we find the program induces a larger reduction of formal employment for individuals with a medium probability to be a registered employee, suggesting some form of segmentation – those with a low propensity to work formally do not respond to the financial incentives of the program. Third, we find evidence that the fall in registered employment is due to a larger extent to an increase in unregistered employment, and to a lesser extent to a shift towards non-employment. Fourth, we find an elasticity of participation in registered employment of about 1.7, implying a deadweight loss from the behavioral responses to the program of about 3.2% of total registered labor income.
    Keywords: welfare policy, labor supply, registered employment, labor informality
    JEL: H31 I38 J22 O17
    Date: 2016–09
  2. By: François Gerard; Gustavo Gonzaga
    Abstract: It is widely believed that the presence of a large informal sector increases the efficiency cost of social programs – transfer and social insurance programs – in developing countries. We evaluate such claims for policies that have been heavily studied in countries with low informality – increases in unemployment insurance (UI) benefits. We introduce informal work opportunities into a canonical model of optimal UI that specifies the typical tradeoff between workers' need for insurance and the efficiency cost from distorting their incentives to return to a formal job. We then combine the model with evidence drawn from comprehensive administrative data to quantify the efficiency cost of increases in potential UI duration in Brazil. We find evidence of behavioral responses to UI incentives, including informality responses. However, because reemployment rates in the formal sector are low to begin with, most beneficiaries would draw the UI benefits absent behavioral responses, and only a fraction of the cost of (longer) UI benefits is due to perverse incentive effects. As a result, the efficiency cost is relatively low, and in fact lower than comparable estimates for the US. We reinforce this finding by showing that the efficiency cost is also lower in labor markets with higher informality within Brazil. This is because formal reemployment rates are even lower in those labor markets absent behavioral responses. In sum, the results go against the conventional wisdom, and indicate that efficiency concerns may even become more relevant as an economy formalizes.
    JEL: H0 J46 J65
    Date: 2016–09
  3. By: Soumyatanu Mukherjee
    Abstract: This paper, using a full-employment general equilibrium model for a developing Asian country like India with internationally non-traded goods and international fragmentation in skill-intensive production, illuminates how liberalised input trade, by enhancing demand for skills in the skill-intensive service sectors, could affect the unskilled wages prevailing in the informal sectors and employment conditions in those sectors, through the existence of finished non-tradable and the corresponding domestic demand-supply forces. The model economy is characterised by dual unskilled labour market with unionised formal and non-unionised informal sectors. Quantitative analyses have also been performed to simulate how the changes in elasticities of factor substitution in production of different sectors account for the movement in informal wage and therefore the movement in skilled–unskilled wage gap. Therefore, the relative wage inequality in a developing Asian country like India with dual labour markets has not been governed only by the increase in the skilled wages.
    Keywords: Input trade reform; non-traded goods; informal wage; informal employment; wage inequality; general equilibrium; India
    Date: 2016
  4. By: Daniel Baksa (Central European University); Zsuzsa Munkacsi (Bank of Lithuania)
    Abstract: In this paper we present the structure of OGRE, a dynamic general equilib-rium model with overlapping generations, unemployment and a shadow economy. Based on a parametrized version of the model, we examine the impacts of aging and calculate multipliers of public pension and other fiscal policies. Also, we contrast macroeconomic reactions with pay-as-you-go and fully funded pension plans. Lastly, we highlight the role of unemployment and that of the underground sector in the framework.
    Keywords: population aging, public old-age pension reforms, pay-as-you-go, fully funded, shadow economy, informal employment, government debt, New Keynesian model, overlapping generations, demography, unemployment, retirement age
    JEL: E24 E26 H55 J11 J46
    Date: 2016–08–23
  5. By: Emmanuele Bobbio (Banca d'Italia)
    Abstract: Italy's growth performance has been lacklustre in the last two decades. The economy has a low R&D intensity; firms are smaller and less likely to grow or exit than firms in other advanced countries; the shadow economy is large. I show how these features arise simultaneously in a Schumpeterian growth model with heterogeneous firms where the tax auditing probability increases with firm size. Tax evasion confers a cost advantage over competitors. In equilibrium, small firms invest less in innovation because growing entails a (shadow) cost of fiscal regularization. Unfair competition forces other firms to lower the mark-up they charge for their new products, reducing the incentive to innovate. Market selection is hampered, further lowering the aggregate growth rate along the extensive margin. I calibrate the model on Italian firm-level data for the period 1995-2006 and find that enforcing taxes would have increased the long-run growth rate from 0.9% to 1.1%. The market share of high type firms would have been 6 percentage points higher and average firm size 20% higher. Also, I find that lowering the tax burden can have a significant impact on growth when the shadow economy is large, while the effect is negligible when taxes are enforced.
    Keywords: growth, innovation, selection, firm dynamics, tax evasion, size dependent policies
    JEL: O30 O43 H26
    Date: 2016–09
  6. By: Derek Kellenberg; Arik Levinson
    Abstract: In official international trade statistics, annual commerce between every pair of countries is reported twice: once by the importing country and once by the exporter. These double reports provide an opportunity for audit. In principle, the two reported trade values should differ systematically only by transport costs, because the values reported by importers include freight and insurance. But in practice, after controlling for distance and other standard trade costs, the remaining gaps between importer- and exporter-reported trade vary systematically with GDP, tariffs and taxes, auditing standards, corruption, and trade agreements, suggesting that firms intentionally misreport trade data. These misreports have implications for trade agreements and domestic fiscal policy, and for empirical assessments of the efficacy of those policies.
    JEL: F14
    Date: 2016–09
  7. By: Daniel Baksa (Central European University); Zsuzsa Munkacsi (Bank of Lithuania)
    Abstract: Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic e ects of public old-age pension reforms and other scal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main nding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.
    Keywords: population aging, public old-age pension reforms, pay-as-you-go, fully funded, shadow economy, informal employment, government debt, New Keynesian model, overlapping generations, demography, unemployment, retirement ageLength: 71 pages
    JEL: E24 E26 H55 J11 J46
    Date: 2016–08–23
  8. By: Ana María Iregui-Bohórquez (Banco de la República de Colombia); Ligia Alba Melo-Becerra (Banco de la República de Colombia); María Teresa Ramírez-Giraldo (Banco de la República de Colombia); Ana María Tribín-Uribe (Banco de la República de Colombia)
    Abstract: Este documento proporciona evidencia empírica sobre los determinantes de la probabilidad de que un hogar tenga crédito, con el sector formal o informal, tanto en zonas urbanas como rurales, para lo cual se utiliza información de la Encuesta Longitudinal Colombiana de la Universidad de los Andes. También, se analizan los posibles factores que afectan la probabilidad de que los hogares se encuentren atrasados en el pago de sus créditos. Los resultados indican que la probabilidad de que un hogar tenga crédito está relacionada positivamente con el hecho de que el jefe del hogar esté casado, con el nivel educativo, el nivel de ingreso, el tamaño del hogar, la propiedad de la vivienda y la participación laboral. En particular, las estimaciones indican que el ingreso y la educación tienen una correlación positiva con la probabilidad de tener crédito formal y negativa con la probabilidad de tener crédito informal. Finalmente, los choques que tienen un efecto directo sobre el ingreso de las familias y eventos inesperados aumentan la probabilidad de estar en mora. *** This paper studies the effects of an in utero program on birth outcomes addressed to vulnerable pregnant women. We use information from the Buen Comienzo program, an initiative run by the local government of Medellin, the second largest city of Colombia. In order to identify the effects we obtain matching estimates using data from program participants and the census of birth statistics. We find that the program increased the birth weight of participant children by 0.09 and 0.23 standard deviations for boys and girls, respectively, and reduced the prevalence of low birth weight by 2.6 and 4.6 ppts for boys and girls, respectively. In terms of size, the program reduces the incidence of being short by 3 and 4 ppts, for boys and girls, respectively. The program also significantly reduced preterm births between 3 and 8 ppts. We also provide evidence of the existence of heterogeneous effects depending on a mother’s exposure to the program and her frequency of attendance. Finally, an estimate of the cost-benefit ratio of the program suggests that its benefits could be 2 to 6 times its costs, respectively for boys and girls born from participant mothers with early exposure to the program. Classification JEL: C25, G21, D12, R22
    Keywords: Deuda de los hogares, crédito formal, crédito informal, mora, Colombia. *** household debt, formal credit, informal credit, credit default, Colombia.
    Date: 2016–08

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