nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2018‒10‒22
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Enforcement of Labor Regulation and the Labor Market Effects of Trade: Evidence from Brazil By Ulyssea, Gabriel; Ponczek, Vladimir
  2. Informal Employment Relationships and the Labor Market: Is there Segmentation in Ukraine? By Hartmut Lehmann; Norberto Pignatti
  3. The Aggregate Consequences of Tax Evasion By Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia
  4. Labour Stand: The face of precarious construction workers in India By Manorajan Dhal

  1. By: Ulyssea, Gabriel (University of Oxford); Ponczek, Vladimir (Sao Paulo School of Economics)
    Abstract: How does enforcement of labor regulations shape the labor market effects of trade? To tackle this question, we exploit the Brazilian trade liberalization episode and exogenous variation in the intensity of both the trade shock and enforcement across local labor markets. Regions with stricter enforcement observed no increase in informal employment but large disemployment effects. Regions with weaker enforcement had no employment losses but substantial increases in informality. All effects are concentrated on unskilled workers, with no effects on skilled workers. The results indicate that informality acts as a buffer that reduces trade-induced adjustment costs in the labor market.
    Keywords: trade, enforcement of labor regulations, informality
    JEL: F16 K31
    Date: 2018–08
  2. By: Hartmut Lehmann (University of Bologna, IZA and DIW); Norberto Pignatti (International School of Economics at Tbilisi State University, Tbilisi; IZA, Bonn)
    Abstract: One of the most important factors that determine individuals’ quality of life and wellbeing is their position in the labor market and the type of jobs that they hold. When workers are rationed out of the formal segment of the labor market against their will, i.e., the labor market is segmented, their quality of life is limited, and their wellbeing is reduced. When they can freely choose between a formal or informal employment relationship, i.e., the labor market is integrated, their wellbeing can reach high levels even in the presence of informal employment. We, therefore, test whether the Ukrainian labor market is segmented along the formal-informal divide, slicing the data by gender and age. The analysis that we perform consist in the analysis of short-term and medium-term transitions between five employment states, unemployment and inactivity. We also analyze wage gaps of mean hourly earnings and across the entire hourly earnings distribution, controlling for time-invariant unobserved heterogeneity. According to our results segmentation is present for dependent employees: for a large part of informal employees informal employment is used as a waiting stage to enter formal salaried employment and is not voluntarily chosen. As far as self-employment is concerned the evidence is mixed regarding in the Ukrainian labor market. This heterogeneity in outcomes implies that not all informal work is associated with a low quality of life and reduced wellbeing in post-transition economies.
    Keywords: Informal Employment, Labor Market Segmentation, Transition Economies, Ukraine
    Date: 2018
  3. By: Di Nola, Alessandro; Kocharkov, Georgi; Scholl, Almuth; Tkhir, Anna-Mariia
    Abstract: There is a sizeable overall tax gap in the U.S., albeit tax noncompliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and inequality. To this end, we develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker and being self-employed. Self-employed agents may hide a share of their business income but are confronted with the probability of being detected by the tax authority. Our model replicates important quantitative features of U.S. data, in particular, the misreporting rate, wealth inequality, and the firm size distribution. Our quantitative findings suggest that tax evasion induces self-employed businesses to stay small. In the aggregate, tax evasion increases the size but decreases the productivity of the self-employment sector. Moreover, it increases aggregate savings and reduces wealth inequality. We show that tax revenues follow a Laffer curve in the size of the tax evasion penalty.
    Keywords: Tax evasion,Self-Employment,Wealth inequality,Tax policy.
    JEL: H24 H25 H26 C63 E62 E65
    Date: 2018
  4. By: Manorajan Dhal (Indian Institute of Management Kozhikode)
    Abstract: As per India Labour and Employment Report, 20141 an overwhelmingly 92 per cent of workers in India are engaged in informal employment and a large majority of them have low earnings with limited or no social protection. India has 36.12 million workers working in construction sector. The state of Orissa in which the study was conducted employs 1.4 million of such employees who work in this informal construction sector. Lack of proper job availability, poor policy measures and minimal support from trade unions have led these labourers to flock together in a particular place on early morning every day in order to find a wage provider for them. It’s a sale of labour for the day where the workers stand and make themselves available for a day to be hired by contractors or individual house owners. These places are known as ‘labour stand’, a stop for finding daily labourers which is new to the literature. Bhubaneswar, the capital city of Orissa houses the second largest labour stand of the country and supplies around 100,000 workers everyday as per the trade unions engaged in their welfare. While the registered workers are covered under the welfare scheme formed under the building and other construction workers (regulation of employment and condition of services) Act, 1996, the state data shows a registration of a mere two percentage of those workers2 . Though the government is collecting cess at the rate of one percent of the total project cost as per the building and other construction workers welfare cess act, 1996, the expenditure of the fund for the benefit stands at a mere 0.01%3 . The paper is based on a field study by analyzing the transcribed records of observation by researcher, field interaction with 84 respondents and 118 still photographs. The data was analyzed by using the atlas.ti qualitative analysis software by adopting open thematic coding and later developing categories and hierarchy and doing comparative analysis. While the labourers were found to be from different social background but from one particular region which is frequently affected by natural disaster. They are challenged by non-availability of regular work, shortage of food, burden with larger family size, social evils of living in a slum and on and above harassed by goons as well as contractors with minimal support from trade union and government. Location of labour stand, skill level and possession of tool has helped in getting job for the labourers. The surprising similarity was found between workers and the contractors in terms of lack of awareness, financial difficulties, harassment by owners, and no support from trade union and government. Though the government has a law and various schemes it has failed to reach out to the beneficiaries. One among the four unions with a developmental approach was found to be taking few measures which are insufficient keeping the size of the labour force. The study analyses the existing policy and also proposes recommendations for the government and the trade union
    Keywords: labour stand, labour, construction, precarious work, trade union, government
    Date: 2018–05

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