nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒07‒15
six papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Labor Market Search, Informality, and On-The-Job Human Capital Accumulation By Matteo Bobba; Luca Flabbi; Santiago Levy; Mauricio Tejada
  2. Low-Skilled Workers and the Effects of Minimum Wage: New Evidence Based on a Density-Discontinuity Approach By Sharon Katzkowicz; Gabriela Pedetti; Martina Querejeta; Marcelo Bérgolo
  3. Estimation of the size of informal employment based on administrative records with non-ignorable selection mechanism By Maciej Ber\k{e}sewicz; Dagmara Nikulin
  4. Merchant's Card Acceptance: An extension of the Tourist Test for Developing Countries By Jose Aurazo; Jose Vasquez
  5. Not Just a Work Permit: EU Citizenship and the Consumption Behavior of Documented and Undocumented Immigrants By Effrosyni Adamopoulou; Ezgi Kaya
  6. Bangladesh’s Formal and Informal Agricultural Trade with SAARC Countries - Emerging Trends and Policy Challenges By Mustafizur Rahman; Estiaque Bari

  1. By: Matteo Bobba (Toulouse School of Economics, University of Toulouse Capitole); Luca Flabbi (Department of Economics, University of North Carolina); Santiago Levy (Vice-Presidency for Sectors and Knowledge, Inter-American Development Bank); Mauricio Tejada (Department of Economics (ILADES), Universidad Alberto Hurtado)
    Abstract: We develop a search and matching model where firms and workers produce output that depends both on match-specific productivity and on worker-specific human capital. The human capital is accumulated while working but depreciates while searching for a job. Jobs can be formal or informal and firms post the formality status. The equilibrium is characterized by an endogenous steady state distribution of human capital and by an endogenous formality rate. The model is estimated on longitudinal labor market data for Mexico. Human capital accumulation on-the-job is responsible for more than half of the overall value of production and upgrades more quickly while working formally than informally. Policy experiments reveal that the dynamics of human capital accumulation magnifies the negative impact on productivity of the labor market institutions that give raise to informality
    Keywords: Labor market frictions, Search and matching, Nash bargaining, Informality, On-the-Job human capital accumulation
    Date: 2019–01
  2. By: Sharon Katzkowicz; Gabriela Pedetti; Martina Querejeta; Marcelo Bérgolo
    Abstract: We estimated the impact of the minimum wage on wages, unemployment, and formal-informal sector mobility for women in the domestic-work sector in Uruguay. Applying the dual-economy, density-discontinuity design developed by Jales (2017), we used cross-sectional data for 2006-2016 from the National Household Survey and found that the minimum wage had significant effects on labor outcomes, with almost 20% of women increasing their wages to reach the minimum. This effect was observed in both the formal and informal sector, though the latter was not covered by the policy. Our results showed a drop in employment as well as a significant effect on sector mobility with negative impacts on formality. Nevertheless, these undesired effects were offset by other labour policies undertaken in the period, by sustained economic growth, and by improvement in labor- market conditions. A novel identification strategy that is particularly suited to developing countries provides empirical evidence regarding the effects of a minimum wage on women workers in the informal sector.
    Keywords: Minimum wage, labour market, gender, informal sector, developing countries
    JEL: J08 J16 J21 J31
    Date: 2019
  3. By: Maciej Ber\k{e}sewicz; Dagmara Nikulin
    Abstract: In this study we used company level administrative data from the National Labour Inspectorate and The Polish Social Insurance Institution in order to estimate the prevalence of informal employment in Poland. Since the selection mechanism is non-ignorable we employed a generalization of Heckman's sample selection model assuming non-Gaussian correlation of errors and clustering by incorporation of random effects. We found that 5.7% (4.6%, 7.1%; 95% CI) of registered enterprises in Poland, to some extent, take advantage of the informal labour force. Our study exemplifies a new approach to measuring informal employment, which can be implemented in other countries. It also contributes to the existing literature by providing, to the best of our knowledge, the first estimates of informal employment at the level of companies based solely on administrative data.
    Date: 2019–06
  4. By: Jose Aurazo (Central Reserve Bank of Peru); Jose Vasquez (Central Reserve Bank of Peru)
    Abstract: This paper extends the tourist test model proposed by Rochet and Tirole (2011) by incorporating the government in order to take into account informality (understood as tax evasion in cash payments) and the net social cost of cash usage. These two elements are relevant in developing countries, where the shadow economy tends to be large and merchants usually evade taxes in cash transactions. The tourist test aims to determine an interchange fee that does not increase merchants' operating cost of accepting card payments. In the presence of informality, the tax gap between card and cash payments reduces merchants' net operating bene t of accepting card sales, which in turn lowers the interchange fee that passes the tourist test. In addition, the interchange fee resulting from the social welfare maximization exceeds this tourist test threshold while the interchange fee that maximizes the total user surplus is still compatible with the tourist test.
    Keywords: Tourist test, card payments, tax evasion, developing countries
    JEL: G21 L11 H26
    Date: 2019–06
  5. By: Effrosyni Adamopoulou; Ezgi Kaya
    Abstract: This paper explores the impact of the 2007 European Union enlargement on the consumption behavior of immigrant households. Using data from a unique Italian survey and a difference-in-differences approach, we find that the enlargement induced a significant consumption increase for the immigrant households from new member states both in the short- and in the medium-run. This enlargement effect cannot be attributed to the mere legalization as it concerns both undocumented and documented immigrants, albeit through different channels. Detailed information on immigrants' legal status (undocumented/documented) and sector of employment (informal/formal) allows us to shed light on the exact mechanisms. Following the enlargement, previously undocumented immigrants experienced an increase in the labor income by moving from the informal towards the formal economy, whereas immigrants who were already working legally in Italy benefitted from the increased probability of getting a permanent contract. Enhanced employment stability in turn reduced the uncertainty about future labor income leading to an increase in documented immigrants' consumption expenditure.
    Keywords: consumption; citizenship; informality; (un)documented immigrants; work permit
    JEL: D12 E21 F22
    Date: 2019–07
  6. By: Mustafizur Rahman; Estiaque Bari
    Abstract: Bangladesh’s agricultural trade with SAARC countries, through formal channels, accounts for only about 2.4 per cent of its global trade. However, formal trade movements do not reveal the actual picture concerning bilateral trade since a significant part of the agricultural trade takes place through informal channels. This paper has attempted to (a) analyse Bangladesh’s agricultural trade pattern, trends and scale with SAARC countries, (b) highlight the related trade and non-trade barriers, (c) identify the concerns of transboundary plant and animal diseases originating from the high informal agricultural trade and, (d) come up with suggestions towards deepening Bangladesh agricultural trade with the SAARC countries. The paper recommends that strengthening port capacity and customs facilities, harmonising customs rules and regulations, cross-border data sharing, pursuing strategic trade liberalisation policies for agricultural trade items and undertaking innovative border initiatives such as border haats could help reduce informal trade in agricultural goods.
    Keywords: SAARC, agricultural trade, bilateral trade, Trade, Global trade, South Asia, Bangladesh
    Date: 2018–06

This nep-iue issue is ©2019 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.