nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒01‒14
seven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality, Labor Regulation, and the Business Cycle By Leyva Gustavo; Urrutia Carlos
  2. Cash and the Economy: Evidence from India's Demonetization By Gabriel Chodorow-Reich; Gita Gopinath; Prachi Mishra; Abhinav Narayanan
  3. Informality over the life-cycle By Julien Albertini; Anthony Terriau
  4. Collusive tax evasion by employers and employees. Evidence from a randomized fi eld experiment in Norway By Marie Bjørneby; Annette Alstadsæter; Kjetil Telle
  5. Tax Evasion and Optimal Corporate Income Tax Rates in a Growing Economy By Hori, Takeo; Maebayashi, Noritaka; Morimoto, Keiichi
  6. Youth Vulnerability in Egypt and Jordan: Dimensions and Determinants By Shireen Al Azzawi; Vladimir Hlasny
  7. Job Stability and Fertility Intentions of Young Adults in Europe: Does Labor Market Legislation Matter? By Karabchuk, Tatiana

  1. By: Leyva Gustavo; Urrutia Carlos
    Abstract: We analyze the joint impact of employment protection and informality on macroeconomic volatility and the propagation of shocks in emerging economies. For this, we propose a small open economy business cycle model with frictional labor markets, labor regulation, and an informal sector, modeled as self-employment. The model is calibrated to the Mexican economy, in particular to business cycle moments for employment and informality obtained from our own calculations with the ENOE survey for the period 2005-2016. We show that international interest rate shocks, which affect specifically job creation in the formal sector, are key to obtain a counter-cyclical informality rate. In our model both the economy without an informal sector and the economy with informality but a lower burden of labor regulation feature higher volatility in employment but smaller fluctuations in TFP and output.
    Keywords: informality;business cycle;small open economy;job creation;employment protection;international interest rate shocks
    JEL: E24 E32 F44 J65
    Date: 2018–11
  2. By: Gabriel Chodorow-Reich; Gita Gopinath; Prachi Mishra; Abhinav Narayanan
    Abstract: We analyze a unique episode in the history of monetary economics, the 2016 Indian “demonetization.” This policy made 86% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: a data set containing the geographic distribution of demonetized and new notes for causal inference; nightlights data and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in employment and nightlights-based output due to demonetization of 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. We use our model to show these cumulated effects are a lower bound for the aggregate effects of demonetization. We conclude that unlike in the cashless limit of new-Keynesian models, in modern India cash serves an essential role in facilitating economic activity.
    JEL: E5 O23
    Date: 2018–12
  3. By: Julien Albertini (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Anthony Terriau (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)
    Abstract: In developing countries, informality is mainly concentrated on younger and older workers. In this paper, we propose a dual labor market theory that highlights how frictions and taxation in the formal sector as well as educational choices interact to shape the informality rate over the life-cycle. We develop a life-cycle model with search frictions, skill heterogeneities, and endogenous educational choices. We carry out a numerical analysis and show that our model reproduces remarkably well the life-cycle patterns of informality, non-employment and formal employment in Argentina. We analyze several public policies and show that an educational grant reduces both informality and non-employment and may be fully financed by the extra tax revenues generated by the increase in formal employment and wages. Lowering taxes may achieve similar results but is detrimental for the government budget, in the case of Argentina, despite increasing the base on which they are levied.
    Keywords: Informality,Search and Matching,Life-cycle,Public policy,Laffer curve
    Date: 2018
  4. By: Marie Bjørneby; Annette Alstadsæter; Kjetil Telle (Statistics Norway)
    Abstract: Third-party reporting and employers’ tax withholding are powerful compliance mechanisms, as long as the employer and employee do not collude to evade. Using data from randomly assigned on-site audits among 2,462 Norwegian firms, we provide evidence of collusive tax evasion. We find that firms assigned to be audited increased their subsequent wage reporting on behalf of their employees by 18 percent relative to firms assigned to the control group. The effect is more pronounced among small firms with few employees. Our results document the limitations of third-party reporting, but also that these limitations can be counteracted by relatively inexpensive on-site audits.
    Keywords: collaborative tax evasion; collusive tax evasion; random audits; undeclared work; third-party reporting
    JEL: E26 H26 H32
    Date: 2018–12
  5. By: Hori, Takeo; Maebayashi, Noritaka; Morimoto, Keiichi
    Abstract: We explore how tax evasion by firms affects the growth- and welfare-maximizing rates of corporate income tax (CIT) in an endogenous growth model with productive public service. We show that the negative effect of CIT on growth is mitigated in the presence of tax evasion. This increases the benefit of raising the CIT rate for public service provision. Thus, in contrast to Barro (1990), the optimal tax rate is higher than the output elasticity of public service. Through numerical exercises, we demonstrate that the role of tax evasion by firms is quantitatively significant.
    Keywords: corporate income tax, tax evasion, growth, welfare
    JEL: H21 H26 O40
    Date: 2018–12–22
  6. By: Shireen Al Azzawi (Santa Clara University); Vladimir Hlasny
    Abstract: Youth unemployment in the MENA region is the highest in the world, at over 40% for males and close to 60% for females. These high levels of unemployment force the most vulnerable of these youth to accept jobs in the informal sector that are insecure and often unsafe. Understanding youth outcomes in the labor market thus requires a broader focus that encompasses a study of not only unemployment and self-employment, but also the availability of decent work. In this study we analyze the static and dynamic nature of vulnerable employment in Egypt and Jordan using recent Labor Market Panel Surveys. We define vulnerable employment as the total of self-employment, unpaid family workers, irregular wage workers and informal private sector workers. We use transition matrices and multinomial logistic regressions to examine workers’ labor marker outcomes, and the interactions of their employment vulnerability with other measures of welfare and deprivation, and family socio-economic status. Beside static analysis of youth workers’ status, we study dynamically workers’ employment growth later in life. Our results show growing trends of vulnerable employment over time in both countries, more so for youth than for older cohorts. Once a young worker starts out in a vulnerable job, she is very unlikely to exit to a better job later on.
    Date: 2018–12–26
  7. By: Karabchuk, Tatiana
    Abstract: Birth rates have declined dramatically in many European countries during the last 40 years. Postponed marriages and delays in childbirth resulting from the global changes in values can only partially explain this decline. A main reason for the decline is the rise in job and income instability caused by labor market polarization. The growth of flexible market relations increased the uncertainty and job instability that are crucial to childbirth planning for young adults. This paper aims to disclose the impact of job instability on the fertility intentions of young European adults by focusing on employment protection legislation (EPL). The empirical analysis is grounded in European Social Survey data of 2004 and 2010 for 27 countries. The results of the multilevel modeling show that job instability measured as temporary employment, informal work, and unemployment decrease fertility intentions. Unemployed young adults plan less for having their first child under a rigid labor market system. Unexpectedly, temporary and informally employed young people decrease their fertility intentions in countries with low EPL rates.
    Keywords: job instability, fertility intentions, employment type, employment protection legislation, dual labor markets, Europe
    Date: 2018–12

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