nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒09‒03
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Tax Evasion and Financial Instability By Ozili, Peterson
  2. Hanging off a cliff: fiscal consolidations and default risk By Francesco Pappada; Yanos Zylberberg
  3. Labor Market Search, Informality and Schooling Investments By Luca Flabbi
  4. Welfare Impact of Social Security Reform: The Case of Chile in 1981 By Kathleen McKiernan
  5. Estimating Self-Employment Income-Gaps from Register and Survey Data: Evidence for New Zealand By Cabral, Ana Cinta G.; Gemmell, Norman
  6. Informal sector innovation in Ghana: Data set and descriptive analysis. By Avenyo, Elvis
  7. Probing for Informal Work Activity By Katharine G. Abraham; Ashley Amaya
  8. Willingness to pay for health insurance in the informal sector of Sierra Leone By Jofre-Bonet, Mireia; Kamara, Joseph
  9. Export boom, employment bust? The paradox of Indonesia's displaced workers, 2000-14 By Shrestha, Rashesh; Coxhead, Ian

  1. By: Ozili, Peterson
    Abstract: This article explores the association between tax evasion and financial instability. The discussion also examines the effect of tax evasion for financial instability. The discussion shows that tax evasion can reduce the tax revenue available to governments to manage the economy and can weaken the government’s ability to promote stability in financial systems, while on the other hand, taxpayers who evade taxes feel they can use the evaded tax money to rather improve their own financial stability.
    Keywords: tax evasion, tax avoidance, financial stability, banking stability, banks, public finance,
    JEL: G21 G28 H12 H21 H24 H25 H26 H27
    Date: 2018–08–11
  2. By: Francesco Pappada (Banque de France); Yanos Zylberberg (University of Bristol)
    Abstract: In countries with imperfect tax enforcement, tax compliance is volatile and markedly responds to fiscal policy. To explore the consequences of this fact, we build a model of sovereign debt with limited commitment and distortionary taxes, in which fiscal consolidations generate long-run distortions which affect default risk. The interaction of imperfect tax enforcement and limited commitment allows to reproduce the following empirical regularities. First, the sensitivity of debt price to fiscal policy differs across environments. Some highly indebted economies are hanging off a cliff, and cannot lower the cost of servicing debt with fiscal consolidations. Second, distortions give rise to pro-cyclical fiscal traps, and periods of high tax rates, low output, high tax evasion and high default risk may be long-lasting. Third, the model replicates dynamics of fiscal policies in high- and low-tax enforcement environments, and rationalizes the rise of pro-cyclical fiscal policies.
    Date: 2018
  3. By: Luca Flabbi (University of North Carolina)
    Abstract: We develop a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether searching for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. We focus on an increasingly important institution: a ``dual" social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. We estimate preferences for the system -- together with all the other structural parameters of the labor market -- using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost that is similar to the one generated by the current system.
    Date: 2018
  4. By: Kathleen McKiernan
    Abstract: Abstract In May 1981, Chile became the first country to address the unsustainability of its pay-as-you-go Social Security program by reforming to a system of individual retirement accounts. In order to quantify the welfare impact of the Chilean reform, I use an overlapping generations model with three main components: multiple productivity types, a government policy modeled on the Chilean system, and a household decision to split working time between a taxed formal sector, an untaxed informal sector, and home production. Blue-collar workers, who pay lower payroll taxes but receive lower pensions prior to the reform, and white-collar workers, who pay higher taxes and receive more generous pensions, experience long-run welfare gains of roughly 25 and 30 percent, respectively. Transitional generations of both types experience welfare losses up to 1 percent. Economies without informality and home production exhibit lower long-run welfare gains. Excluding the options for households to work informally and at home decreases welfare gains for two reasons: (1) both informality and home production increase labor supply elasticity and cause the pay-as-you-go payroll tax to be more distortionary; and (2) informality allows workers to take advantage of long-run wage increases from the reform without facing the distortion caused by remaining labor taxation.
    Date: 2018
  5. By: Cabral, Ana Cinta G.; Gemmell, Norman
    Abstract: This paper provides estimates of the income-gap of the self-employed – defined as the proportion of undeclared to true income – in New Zealand using traces of expenditure to infer true income holdings following the approach of Pissarides and Weber (1989) and Feldman and Slemrod (2007). This uses the relationship between expenditure and income for the employed (with lower opportunities to evade) to infer the true income of the self-employed.We use a unique dataset – New Zealand’s Integrated Data Infrastructure (IDI) – that matches individual data including incomes and expenditures from the Household Economic Survey with register incomes declared to the tax administration. This has several advantages in our context. Firstly, register data minimises income measurement error by employed and self-employed as it does not rely on accurate recall by survey participants. Secondly, the approach allows us to measure evasion under different incentives for misreporting. We estimate that the self-employed underreport on average around 20% of their income (with a 95% confidence interval around 10-30%), and that the income-gap varies significantly by gender and region. Our results are also found to be highly robust to a range of sensitivity tests for measurement error.
    Keywords: Tax evasion, Shadow economy, Income underreporting, Self-employed,
    Date: 2018
  6. By: Avenyo, Elvis (UNU-MERIT)
    Abstract: While informal enterprises and their activities dominate sub-Saharan African (SSA) economies, data on 'informal' innovation activities remain lacking. This paper presents descriptive statistics from survey data collected in 2016, on the types of innovations informal enterprises adopt and/or adapt in urban Ghana (Accra and Tema). Using zones defined in the Ghana Informal Enterprise Survey (GIFS) of the World Bank as area-based frame, and randomly selecting and canvassing 17 zones, the study identified and interviewed 513 informal enterprises. The analysis reveals that informal enterprises do innovate. Innovations, as found in formal enterprises as well, are not big swings, that is, not radical but incremental, and are found to occur over several years. These suggest that incremental innovations, notwithstanding, are important to the survival of sampled informal enterprises.
    Keywords: Innovation, Informal Sector, Survey, Ghana, sub-Saharan Africa
    JEL: C83 D22 H32 L11 O17 O31
    Date: 2018–08–08
  7. By: Katharine G. Abraham; Ashley Amaya
    Abstract: The Current Population Survey (CPS) is the source of official U.S. labor force statistics. The wording of the CPS employment questions may not always cue respondents to include informal work in their responses, especially when providing proxy reports about other household members. In a survey experiment conducted using a sample of Mechanical Turk respondents, additional probing identified a substantial amount of informal work activity not captured by the CPS employment questions, both among those with no employment and among those categorized as employed based on answers to the CPS questions. Among respondents providing a proxy report for another household member, the share identifying additional work was systematically greater among those receiving a detailed probe that offered examples of types of informal work than among those receiving a simpler global probe. Similar differences between the effects of the detailed and the global probe were observed when respondents answered for themselves only among those who had already reported multiple jobs. The findings suggest that additional probing could improve estimates of employment and multiple job holding in the CPS and other household surveys, but that how the probe is worded is likely to be important.
    JEL: J21
    Date: 2018–08
  8. By: Jofre-Bonet, Mireia; Kamara, Joseph
    Abstract: Purpose The objective of this project is to study the willingness to pay (WTP) for health insurance (HI) of individuals working in the informal sector in Sierra Leone, using a purposely-designed survey of a representative sample of this sector. Methods We elicit the WTP using the Double-Bounded Dichotomous Choice with Follow Up method. We also examine the factors that are positively and negatively associated with the likelihood of the respondents to answer affirmatively to joining a HI scheme and to paying three different possible premiums, to join the HI scheme. We additionally analyze the individual and household characteristics associated with the maximum amount the household is willing to pay to join the HI scheme. Results The results indicate that the average WTP for the HI is 20,237.16 SLL (3.6 USD) per adult but it ranges from about 14,000 SLL (2.5 USD) to about 35,000 SLL (6.2 USD) depending on region, occupation, household and respondent characteristics. The analysis of the maximum WTP indicates that living outside the Western region and working in farming instead of petty trade are associated with a decrease in the maximum premium respondents are WTP for the HI scheme. Instead, the maximum WTP is positively associated to being a driver or a biker; having secondary or tertiary education (as opposed to not having any); the number of pregnant women in the household; having a TV; and, having paid for the last medical requirement. Conclusions In summary, the various analyses show that a premium for the HI package could be set at approximately 20,000 SLL (3.54 USD) but also that establishing a single premium for all individuals in the informal sector could be risky. The efficient functioning of a HI scheme relies on covering as much of the population as possible, in order to spread risks and make the scheme viable. The impact of the various population characteristics raises the issue of how to rate premiums. In other words, setting a premium that may be too high for a big proportion of the population could mean losing many potential enrollees and might have viability consequences for the operation of the scheme.
    JEL: J1
    Date: 2018–05–16
  9. By: Shrestha, Rashesh; Coxhead, Ian
    Abstract: In Indonesia, an export boom and sustained, rapid GDP growth in the decade after 2000 was accompanied by real earnings that were flat on average, and even declining for many workers. Conventional models of growth and trade predict that labor productivity rises as an economy develops; that this should not be observed during a period of high GDP growth is a puzzle that merits careful investigation. In this paper we explore these seemingly paradoxical trends using several waves of a panel of individual employment data. Economic growth is rarely balanced in a sectoral sense, and the nature of the structural change experienced by Indonesia is also strongly associated with lower competitiveness in sectors where formal employment rates are high, causing some degree of involuntary labor movement from formal to informal modes of employment. We explore this econometrically and find that the earnings of workers displaced from formal to informal jobs are significantly lower relative to workers who remain in the formal market. The fact of this displacement, and its implications for individual earnings, undercuts conventional thinking about the welfare gains from a sustained growth experience. Our findings add, perhaps for the first time, a developing-country dimension to the existing job displacement literature. They also shed some light on the causes of Indonesia's unprecedented increase in inequality during the same growth epoch.
    Keywords: Displacement, Formal, Informal, Earnings, Indonesia
    JEL: E24 F16 J23 J63 O17
    Date: 2018–08

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