nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2016‒10‒23
thirteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality in the Process of Development and Growth By Norman V. Loayza
  2. Employment in a time of high growth in India By Ghose, Ajit K.
  3. The effects of industrial work on income and health: Experimental evidence from Ethiopia By Blattman, Christopher; Dercon, Stefan
  4. The effects of non-standard forms of employment on worker health and safety By Quinlan, Michael.
  5. Occupational Choice in Early Industrializing Societies: Experimental Evidence on the Income and Health Effects of Industrial and Entrepreneurial Work By Blattman, Christopher J.; Dercon, Stefan
  6. Macroeconomic Dynamics with Limited Commitment in Financial and Labor Contracts By Shingo Ishiguro
  7. The importance of informal finance in promoting decent work among informal operators : a comparative study of Uganda and India By Aliber, Michael.
  8. Microfinance and formalization of enterprises in the informal sector : microfinance and formalization of enterprises in the informal economy: awareness raising campaign and BDS for the formalization and strengthening of growth- oriented enterprises ESAF: a qualitative follow-up study By Olapade, Markus.
  9. Information Sharing and Financial Sector Development in Africa By Tchamyou, Vanessa; Asongu, Simplice
  10. Social Network, Financial Market Participation and Asset Allocation: Evidence from China By Hu, Jinyan; Jiang, Mingming; Zhang, Bo
  11. VAT Evasion in Bulgaria: A General-Equilibrium Approach By Aleksandar Vasilev
  12. Responses of firms to tax, administrative and accounting rules: Evidence from Armenia By Asatryan, Zareh; Peichl, Andreas
  13. Study to Quantify and Analyse the VAT Gap in the EU Member States: 2016 Final Report By Grzegorz Poniatowski; Mikhail Bonch-Osmolovskiy; Misha Belkindas

  1. By: Norman V. Loayza (World Bank)
    Abstract: “Informality” is a term used to describe the collection of firms, workers, and activities that operate outside the legal and regulatory systems. It is widespread in the majority of developing countries—in a typical developing economy, the informal sector produces about 35 percent of gross domestic product and employs 70 percent of the labor force. This paper studies informality in the context of economic development by presenting a model and projections that link informality, regulations, migration, and economic growth. This analytical framework highlights the trade-offs between formality and informality, the relationship between the different types of informality, and the connection between them and the forces of labor, capital, and productivity growth. The paper models the behavior of the informal sector based on the following fundamental asymmetry: formal firms confront higher labor costs while informal firms face higher capital costs and lower productivity. Using mandated minimum wages as the policy-induced distortion, the model first studies the static allocation of formal and informal capital and labor in a modern economy. Second, it opens the possibility of labor migration from a rudimentary economy with an ample supply of labor (rural areas or less advanced neighboring countries). Third, the model analyzes the dynamic behavior of the formal and informal sectors, considering how they affect and are affected by economic growth and labor migration. Then, the paper presents projections for the size of labor informality, in the modern and rudimentary economies, in the next two decades for a large group of countries representing all regions of the world. The projections are based on the calibration and simulation of the model and serve to discuss its usefulness and limitations.
    Keywords: Shrinkage, Informality, Minimum Wage, Labor Costs, Economic Growth, Migration, Labor Market, Financial Constraints, Productivity
    JEL: E26 E24 J46 O17 O11 O15 O40 O47
    Date: 2016–10
  2. 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
  3. By: Blattman, Christopher; Dercon, Stefan
    Abstract: Activists criticize the poor wages and working conditions in industrial firms. Others counter that these industrial jobs offer wage premiums and steady hours. We worked with five Ethiopian industrial firms to randomize entry-level applicants to one of three treatment arms: a job offer; a control group; or an improved self-employment option, $300 grants plus business training. Industrial jobs offered more hours than the informal sector but lower wages, and had little impact on incomes after a year. Most applicants quit the sector quickly, finding industrial jobs unpleasant and risky. Indeed, serious health problems rose one percentage point for every month of industrial work. Meanwhile, the grants stimulated self-employment, raising earnings by 33%. On balance, these Ethiopian industrial jobs appear to be unremarkable low-skill employment options, with serious health risks, that poor people take to cope with bad shocks and avoid when informal employment options are available.
    Keywords: cash transfers; employment; entrepreneurship; factories; field experiment; wage labor
    JEL: F16 J24 J81 O14 O17
    Date: 2016–10
  4. By: Quinlan, Michael.
    Abstract: The past 40 years have witnessed significant changes to work arrangements globally. Overall, the changes have been characterised by less contract duration and job security, more irregular working hours (both in terms of duration and consistency), increased use of third parties (temporary employment agencies), growth of various forms of dependent self-employment (like subcontracting and franchising) and also bogus/informal work arrangements (i.e. arrangements deliberately outside the regulatory framework of labour, social protection and other laws).
    Keywords: precarious employment, temporary employment, informal employment, self employment, occupational health, occupational safety, working conditions, hours of work, employment policy, emploi précaire, emploi temporaire, emploi informel, travail indépendant, santé au travail, sécurité du travail, conditions de travail, durée du travail, politique de l'emploi, empleo precario, empleo temporal, empleo informal, trabajo por cuenta propia, salud en el trabajo, seguridad en el trabajo, condiciones de trabajo, horas de trabajo, política de empleo
    Date: 2015
  5. By: Blattman, Christopher J. (Harris School, University of Chicago); Dercon, Stefan (Department for International Development (DFID))
    Abstract: As low-income countries industrialize, workers choose between informal self-employment and low-skill manufacturing. What do workers trade off, and what are the long run impacts of this occupational choice? Self-employment is thought to be volatile and risky, but to provide autonomy and flexibility. Industrial firms are criticized for poor wages and working conditions, but they could offer steady hours among other advantages. We worked with five Ethiopian industrial firms to randomize entry-level applicants to one of three treatment arms: an industrial job offer; a control group; or an "entrepreneurship" program of $300 plus business training. We followed the sample over a year. Industrial jobs offered more hours than the control group's informal opportunities, but had little impact on incomes due to lower wages. Most applicants quit the sector quickly, finding industrial jobs unpleasant and risky. Indeed, serious health problems rose one percentage point for every month of industrial work. Applicants seem to understand the risks, but took the industrial work temporarily while searching for better work. Meanwhile, the entrepreneurship program stimulated self-employment, raised earnings by 33%, provided steady work hours, and halved the likelihood of taking an industrial job in future. Overall, when the barriers to self-employment were relieved, applicants appear to have preferred entrepreneurial to industrial labor.
    Keywords: wage labor, factories, employment, entrepreneurship, cash transfers, field experiment
    JEL: J24 O14 F16 J81 O17
    Date: 2016–10
  6. By: Shingo Ishiguro (Graduate School of Economics, Osaka University)
    Abstract: WThis paper presents a dynamic general equilibrium model to investigate the coevolution of employment and financial systems in the process of economic development when firms f commitment to financial and labor contracts is limited. We show that equilibrium modes of financial and labor contracts endogenously change from the informal contracting phase in which both of them are implicitly self-enforced to the formal contracting phase in which they are formally enforced and become more market-based as economies develop well. Furthermore, the formal contracting phase is irreversible in the sense that, once the economy enters that regime, it never returns back to the informal contracting phase.
    Keywords: Dynamic General Equilibrium, Insider Lending, Implicit and Explicit Labor Contracts, Market Lending
    JEL: D86 J41 J64
    Date: 2016–10
  7. By: Aliber, Michael.
    Abstract: Informal finance mechanisms are as diverse as they are ubiquitous, including institutions such as rotating savings and credit associations (ROSCAs), accumulating savings and credit associations (ASCAs), informal moneylending, loan brokers, and burial societies, to name a few. Such mechanisms may or may not be 'traditional', and range from simple to complex. They attend to diverse needs such as consumption smoothing, enterprise financing, promoting savings discipline, and intermediation between savers and borrowers. Arguably, the core-identifying characteristic of informal financial institutions is that emphasize inter-personal relationships, rather than relying on anonymous interaction between a client and a formal institution.
    Keywords: access to credit, informal economy, small enterprise, small scale industry, saving, low income, regional level, India, Uganda
    Date: 2015
  8. By: Olapade, Markus.
    Abstract: This report is based on a qualitative follow-up study to the quantitative impact evaluation study conducted in 2012 to assess the impacts of the formalization campaign on Formalisation, business outcomes, socio-economic outcomes and credit taking behaviour. The present study complements the initial quantitative study by assessing whether the high rate of formalization among the target group clients has had further effects on relevant business and socio- economic indicators2. The initial study found the puzzling result that the large extent of formalization that followed the campaign was accompanied only with small effects on business and socio-economic outcomes. In addition, the present study investigates whether Evangelical Social Action Forum's (ESAF) formalization activities represent a business case that improves the MFIs performance.
    Keywords: enterprise development, informal economy, microfinance, impact evaluation, regional level, India, développement d'entreprise, économie informelle, microfinance, évaluation de l'impact, niveau régional, Inde, desarrollo empresarial, economía informal, microfinanciamiento, evaluación de impacto, nivel regional, India
    Date: 2015
  9. By: Tchamyou, Vanessa; Asongu, Simplice
    Abstract: This study investigates the effect information sharing has on financial sector development in 53 African countries for the period 2004-2011. Information sharing is measured with private credit bureaus and public credit registries. Hitherto unexplored dimensions of financial sector development are employed, namely: financial sector dynamics of formalization, informalization and non-formalization. The empirical evidence is based on Ordinary Least Squares (OLS) and Generalised Method of Moments (GMM). The following findings are established. Information sharing bureaus increase (reduce) formal (informal/non-formal) financial sector development. In order to ensure that information sharing bureaus improve (decrease) formal (informal/non-formal) financial development, public credit registries should have between 45.45 and 50 percent coverage while private credit bureaus should have at least 26.25 percent coverage.
    Keywords: Information sharing; Banking ; Africa
    JEL: G20 G29 L96 O40 O55
    Date: 2016–01
  10. By: Hu, Jinyan (School of Economics, Shandong University); Jiang, Mingming (School of Economics, Shandong University); Zhang, Bo (School of Economics, Shandong University)
    Abstract: According to the 2011 Chinese Household Finance Survey, about 21.8% of Chinese households participate in the financial market; risky financial assets account for about 8% of total household financial assets. Limited participation and low risky asset holding appear as two features of Chinese household finance. This paper explores the effects of social network, as an important content of social capital, on household financial market participation and asset allocations in both the formal and informal financial markets. Our analysis shows that households with a broader social network admit a higher possibility of financial market participation and a higher fraction of risky asset holding. This finding is robust to various control variables and to the instrumental variable estimations. In addition, two working mechanisms are identi ed. On the one hand, social network directly helps households to obtain necessary information, reducing the required participation cost and raising the chance of financial market participation. On the other hand, social network functions as an informal institution that facilitates household risk-sharing and affects their risk attitude, hence indirectly changing household financial market decisions.
    Keywords: Social Network, Financial Market Participation, Asset Allocation
    JEL: D31 G11 Z13
    Date: 2015–05–08
  11. By: Aleksandar Vasilev (Department of Economics, American University in Bulgaria)
    Abstract: This paper utilizes an otherwise standard micro-founded general-equilibrium setup, which is augmented with a revenue-extraction mechanism to assess the magnitude of VAT evasion. The model is calibrated to Bulgaria after the introduction of the currency board (1999-2014), as one of the very few countries in Europe with a non-di erentiated consumption tax rate, and an economy where VAT revenue makes almost half of total government tax revenue. A computational experiment performed within this setup estimates that on average, the size of evaded VAT is a bit more than one-fourth of output, an estimate which is in line with the gures provided in both Philip (2014) and the European Commission (2014). In addition, model-based simulations suggest that increases in spending on law and order could generate substantial welfare gains by decreasing VAT evasion.
    Keywords: VAT evasion, general equilibrium, Bulgaria
    JEL: D58 E26 H26 K42
    Date: 2016–10
  12. By: Asatryan, Zareh; Peichl, Andreas
    Abstract: Using panel data on the full population of corporate tax returns of Armenian firms, we study the behavioral response of firms to three size-dependent regulations. We find: i) a strong response to an accounting notch where International Financial Reporting Standards become mandatory; ii) a moderate response to an administrative notch below which the frequency of filing and paying taxes declines from monthly to quarterly; and iii) no response to a tax notch created by the registration threshold of the value added tax. Exploiting tax audits, we provide evidence suggesting that income under-reporting drives the bunching response of firms by between 60 and 100 percent. Additional evidence suggests that firms respond to tax audits by compensating every additional dollar of audit driven increase in reported income by a 0.7-0.8 dollar increase in reported deductions.
    Keywords: small and medium enterprises,size-dependent regulation,value added tax,tax administration,tax accounting,tax evasion
    JEL: H25 H26 O12
    Date: 2016
  13. By: Grzegorz Poniatowski; Mikhail Bonch-Osmolovskiy; Misha Belkindas
    Abstract: This analysis serves as the Final Report for the DG TAXUD Project 2015/CC/131, “Study and Reports on the VAT Gap in the EU-28 Member States”, which is a follow up to the reports published in 2013, 2014, and 2015. In this report, we present estimates of the VAT Gap and the Policy Gap for the year 2014, as well as revised estimates for the years 2010-2013 due the transmission of Eurostat national accounts from the ESA95 to the ESA10. This update covers Croatia, which was not included in the previous updates. While it was hoped that the update would also cover Cyprus, it has not been possible due to incomplete national accounts data.
    Keywords: consumption taxation, VAT, tax fraud, tax evasion, tax avoidance, tax gap, tax non-compliance, policy gap
    JEL: H24 H26
    Date: 2016–09

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