nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2019‒09‒30
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Does Informality facilitate Inflation Stability? By Enrique Alberola; Carlos Urrutia
  2. Labor Earnings Dynamics with a Large Informal Sector By Diego Gomes; Cezar Santos; Felipe Iachan
  3. How Do Regulated and Unregulated Labor Markets Respond to Shocks? Evidence from Immigrants During the Great Recession By Sergei Guriev; Biagio Speciale; Michele Tuccio
  4. The Georgian Tax Lottery of 2012. A Multi-Methodological Assessment By Lotta Björklund Larsen; Rubina Arakelyan; Teimuraz Gogsadze; Mariam Katsadze; Sophiko Skhirtladze; Nino Muench

  1. By: Enrique Alberola (BIS); Carlos Urrutia (ITAM)
    Abstract: Informality is an entrenched structural trait in emerging market economies, despite of the progresses achieved in macroeconomic management. Informality determines the behavior of labour markets, financial access and the productivity of the overall economy. Therefore it influences the transmission of shocks and also of monetary policy. This paper develops a simple general equilibrium closed economy model with nominal rigidities, labor and financial frictions. Informality is captured by a dual labour market where the share of informal workers is endogenous. Only formal sector firms have access to financing, which is instrumental in their production process. Informality has a bu↵ering e↵ect on the propagation of demand and supply shocks to prices; the financial feature of the model boosts the impact of financial shocks in the formal sector while the informal sector is in principle unaffected. As a result informality dampens the impact of demand and financial shocks on wages and inflation but heighten the impact of technology shocks. Informality also increases the sacrifice ratio of monetary policy actions. From a Central Bank perspective, the results imply that the presence of an informal sector mitigates inflation volatility for some type of shocks but makes monetary policy less effective.
    Date: 2019
  2. By: Diego Gomes (University of Alberta); Cezar Santos (Fundacao Getulio Vargas); Felipe Iachan (FGV)
    Abstract: We study labor earnings dynamics in a developing economy with a large informal sector. We use nationally representative Brazilian panel data that cover both formal and informal workers. We provide two main contributions. First, we document large disparities in earnings fluctuations faced across these segments of the labor market, as well as the high intensity of transitions between them. Informality is associated with more volatile earnings, while agents in the formal sector are subject to significant downside risk. Transitions across formal and informal employment bring large earnings shocks on average and have a frequency that depends on age and the initial earnings level. Second, we assess the consequences of these empirical disparities on decisions of consumption and savings. Our tool is a standard life cycle model with heterogeneous agents where the earnings processes are estimated to reflect the aforementioned empirical findings. The simulations reveal sizable impacts.
    Date: 2019
  3. By: Sergei Guriev (Département d'économie); Biagio Speciale (Ecole d'Économie de Paris - Paris School of Economics (PSE)); Michele Tuccio (Université Paris-Dauphine)
    Abstract: We study wage adjustment during the recent crisis in Italy using a unique dataset on immigrant workers that includes those employed in formal and informal sector. We find that before the crisis immigrants’ wages in the formal and informal sectors moved in parallel (with a 15% premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32%. The difference was particularly salient for workers in occupations where the minimum wage is likely to be binding, and in “simple” occupations where there is high substitutability between immigrant and native workers. Calibrating a simple partial equilibrium model of spillovers between formal and informal markets, we find that less than 10% of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5–4.5%—much lower than 16% decline that we observe in the data.
    JEL: E24 E26 J31 J61
    Date: 2019–03
  4. By: Lotta Björklund Larsen (TARC (Tax Administration Research Centre) at University of Exeter Business School); Rubina Arakelyan (ISET - International School of Economics at Tbilisi State University); Teimuraz Gogsadze (ISET - International School of Economics at Tbilisi State University); Mariam Katsadze (ISET - International School of Economics at Tbilisi State University); Sophiko Skhirtladze (ISET - International School of Economics at Tbilisi State University); Nino Muench
    Abstract: Tax lotteries are seen as ways to relatively easily augment public revenue while also increasing compliance. Tax lotteries are constructed so that consumers are nudged to ask for a receipt when making a purchase. This receipt contains information so that it can also be used as a lottery ticket with the possibility of winning prizes. Such tickets also leave traces of transaction records so that revenue authorities can audit vendors. Given this background, the aim of this paper is to provide a broad, multi-methodological and socio-economic assessment of Georgia’s tax lottery experience in 2012. Our assessment aims to describe the design of the lottery and its functioning in practice, to evaluate how the introduction of the tax lottery influenced the effectiveness of tax administration in Georgia at the country, regional, and firm level and to investigate Georgian citizens’ views of the Georgian Revenue Service (GRS) and if tax compliance was improved by the tax lottery. Economic assessment, based on data from 2012 and 2013 on weekly transactions per cash register, using three econometric specifications show that during the lottery weeks, there is a significant increase in the aggregate weekly sales compared to the non-lottery weeks. The number of cash registers reporting their income and the average weekly sales are also higher in lottery weeks. Thus, there are proper foundations to argue that the lottery propelled the increase in reported income. But this tax lottery also aimed to popularize the cash registers as well as to improve citizens’ attitude towards the GRS. Following our qualitative investigation and assessment into the Georgian Tax Lottery we would like to add the following points. GRS achieved its purpose, at least in the short term. More revenue was collected and vendors became very conscious and aware of printing and giving receipts to customers. However, what the impact became in the long run, is harder to say. Strategies of “love and fear” are difficult to make work in combination, and we find it hard to say that citizens’ views of the GRS improved. Perhaps even the contrary could be proposed.
    Keywords: Tax Lottery, Tax Evasion, Interdisciplinary Tax Study
    Date: 2019

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