nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒03‒02
eight papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Casting a Shadow : Productivity of Formal Firms and Informality By Amin,Mohammad; Ohnsorge,Franziska Lieselotte; Okou,Cedric Iltis Finafa
  2. Can Taxes Help Ensure a Fair Globalization ? By Langot,Francois; Merola,Rossana; Oh,Samil
  3. Trust to Pay ? Tax Morale and Trust in Africa By Kouame,Wilfried Anicet Kouakou
  4. Informal Economy in SSA: Characteristics, size and tax potential By Makochekanwa, Albert
  5. Informal Employment and Worker's Well-Being in the Russian Federation By Kim,Yeon Soo; Matytsin,Mikhail; Freije-Rodriguez,Samuel
  6. Socio-Economic Status of Urban Madurai Street Vendors-A Micro-Level Analysis By R, Albert Christopher Dhas
  7. RUSMOD -- A Tool for Distributional Analysis in the Russian Federation By Matytsin,Mikhail; Popova,Daria; Freije-Rodriguez,Samuel
  8. Sham Litigation, Delayed Tax Payment and Evasion: The Role of Informal Credit Market By Sugata Marjit; Suryaprakash Mishra; Sandip Mitra

  1. By: Amin,Mohammad; Ohnsorge,Franziska Lieselotte; Okou,Cedric Iltis Finafa
    Abstract: Using firm-level survey data for a large cross section of countries, the paper assesses the gap in labor productivity between formal and informal firms in developing countries for which comparable data are available. It also investigates the impact of competition from informal firms on the labor productivity of formal firms. The results show that on average, the labor productivity of informal firms is about one-fourth that of formal firms. Moreover, the labor productivity of formal firms that face competition from informal firms is about 75 percent of the average labor productivity of formal firms that do not experience informal competition. This suggests that competition from the informal sector can erode formal firms'market share and the resources available to boost productivity where formal firms shoulder the additional cost of regulatory compliance. These findings are robust to a range of firm and country characteristics as well as checks for endogeneity concerns.
    Keywords: Labor Markets,Employment and Unemployment,Plastics&Rubber Industry,Business Cycles and Stabilization Policies,Textiles, Apparel&Leather Industry,Pulp&Paper Industry,Food&Beverage Industry,Common Carriers Industry,Construction Industry,General Manufacturing,Educational Sciences
    Date: 2019–07–22
  2. By: Langot,Francois; Merola,Rossana; Oh,Samil
    Abstract: This paper analyzes whether taxation can be successfully used to reduce the incidence of labor informality and achieve higher equality in a globalized economy. To this purpose, it develops a two-area model: a developed country and an emerging country. The two areas differ according to the size of the informal sector, which is characterized by a more flexible labor market and lower productivity. To illustrate the potential role of taxation in achieving a more fair income distribution, the paper introduces a trade shock to simulate the effects of trade liberalization. Trade expansion has often been blamed for leading to an expansion of the informal sector and a widening of wage income disparities. In this context, the paper analyzes whether a budget-neutral tax reform -- switching the tax burden from payroll taxes paid by firms operating in the formal sector to a consumption tax -- can mitigate possible adverse effects of trade liberalization and support labor formalization. The effects of taxation are seen in the context of the trade-offs between growth, labor formality and equity. The analysis suggests that small improvements in formalization, resulting from the tax reform, come at the cost of widening income inequality. To reduce the incidence of low-quality jobs, tax policy interventions should go hand in hand with more effective social protection systems and labor laws.
    Keywords: International Trade and Trade Rules,Labor Markets,Public Finance Decentralization and Poverty Reduction,Macro-Fiscal Policy,Taxation&Subsidies,Economic Adjustment and Lending,Public Sector Economics,Employment and Unemployment,Rural Labor Markets
    Date: 2019–08–12
  3. By: Kouame,Wilfried Anicet Kouakou
    Abstract: Although low tax morale hits developing countries hardest, little is known about its determinants in those countries. This paper examines the impact of trust in public institutions and the neighborhood on individual tax morale in four African countries: Algeria, Ghana, Morocco, and Nigeria. First, the paper provides theoretical foundations of such a relationship. Further, the paper uses the World Value Survey to estimate the effects of trust in public institutions and the neighborhood on individual tax morale. The identification strategy employs the instrumental variables method and relies on historical data on the slave trade and the literature on the cultural heritage of trust. The paper finds that trust in public institutions and the neighborhood are largely associated with tax morale in the African countries under consideration. The findings are robust to an alternative identification strategy, additional controls, and a falsification test.
    Keywords: Tax Law,Educational Sciences,International Trade and Trade Rules,Culture in Sustainable Development,Literature&Folklore,Culture and Cultural Practice,Artisans,Arts&Music,Cultural Policy,Cultural Heritage&Preservation
    Date: 2019–08–06
  4. By: Makochekanwa, Albert
    Abstract: The study analyzed informal economy (IE) in SSA. The research provided insights into various possible definitions of IE, elaborated on the major causes and characteristics of this sector in Africa. The size of informal economy activities in terms of contribution to GDP and employment was also analyzed. Tax and revenue potential from the informal economy activities was also investigated. With regards to size, the informal economy in Africa in terms of its contribution to GDP has declined from an average of 42% of total GDP in 1991 to 35% of total GDP by end of 2015. At country level, the study found that Zimbabwe was the country with highest level of informality with informal economy contributing on average 61% towards the country’s GDP. Informal economy activities for Zimbabwe have actually grown from contribution 57% towards annual GDP in 1991 to 67% of GDP in 2015. On the other extreme, Mauritius was the country with least informal economy activities which averaged 23% towards national GDP. Informal economy activities for Mauritius actually decreased from contributing 26% towards the country’s GDP in 1991 to 19% of its GDP in 2015. The contribution of informal economy work towards employment in Africa was found to be around 80% in terms of non-agricultural jobs, over 60% of urban employment and over 90% of new jobs. Going into the future and after taking on board cost and benefit analysis, the paper analyzed three possible strategies that can be employed in taxing activities in the informal economy in Africa. These three options are (i) taxing indirectly through trade taxes, (ii) expanding the reach of major formal sector taxes, and (iii) developing specialized presumptive tax regimes.
    Keywords: Informal Economy, SSA, Taxation
    JEL: A10
    Date: 2020–02–01
  5. By: Kim,Yeon Soo; Matytsin,Mikhail; Freije-Rodriguez,Samuel
    Abstract: This paper finds that informal workers are more likely to have inferior work conditions, but do not necessarily report worse subjective well-being. Starting with lower wages, but also with less regularity of hours and paid vacation, informal workers have higher incidence of envelope payments than formal workers but not of hazardous or unstable jobs. After controlling for work conditions, informal workers do not have statistically significantly lower job satisfaction and under no specification are informal workers more likely to self-assess worse health than formal workers. Finally, there is some association between informal employment and household poverty and life satisfaction, but it is not robust to changes in econometric specification or sample composition. The authors conclude that the evidence indicates that informal employment in the Russian Federation is mostly a problem of labor productivity and the design of the social protection system, but worsening wages and some association between informality and household poverty indicate that informality may also be a social equity problem.
    Keywords: Employment and Unemployment,Rural Labor Markets,Labor Markets,Health Care Services Industry
    Date: 2019–08–20
  6. By: R, Albert Christopher Dhas
    Abstract: Street Vending is one of the fundamental constituents of urban economies and also a distinctive part of large informal sector. Though street vendors contribute to the economy in many ways (creates employment, produces and distributes goods/services at affordable prices), they did not get the required attention of the planners, policy makers and public. On realizing the contributions and the need to integrate them in the growth process of the economy, Parliament of India enacted an Act namely, Street Vendors (Protection of Livelihood and Regulation of Street Vending) Act, 2014 to regulate street vendors in public areas and protect their rights. The objective of this chapter is to examine the socio-economic conditions street vendors of urban Madurai, based on the primary survey conducted among 200 respondents during the year 2019. The socio-economic condition of street vendors could be understood by examining the characteristics such as religion, caste, community, nature, size of family, education, marital status, migration, employment, housing condition, income, expenditure and savings, indebtedness, etc. The study concluded that the socio-economic conditions of the street vendors are still poor and there are several areas on which there is scope for intervention and improvement. The development in the socio-economic conditions can be achieved with the support of street vendors, family members, local organisations and NGOs and Government. This calls for a coordinated effort from all individuals and institutions.
    Keywords: Socio-Economic Status, Socio-Economic Conditions, Socio- demographic Profile, Small Business, Small Enterprises, Street Vending, Street Vendors. Urban Madurai, Tamil Nadu
    JEL: A1 A10 A14 J15 R1
    Date: 2020–02–07
  7. By: Matytsin,Mikhail; Popova,Daria; Freije-Rodriguez,Samuel
    Abstract: The purpose of this paper is to introduce applications of RUSMOD -- a microsimulation model for fiscal incidence analysis in the Russian Federation. RUSMOD combines household survey micro-data and fiscal policy rules to simulate the Russian tax-benefit system: the size and distribution of taxes collected and benefits paid, and the impact of the system on different population groups. Microsimulation models, such as RUSMOD, are habitually used in developed countries, and can be versatile budgetary policy tools. Using this model, the current tax-benefit system in Russia is examined. The impact of the system is measured across the income distribution, age groups, family types, localities, as well as across time. One of the applications of RUSMOD this paper aims to assess is the role of the tax-benefit system in explaining the incidence of informal employment in Russia. The paper investigates whether the existing system creates disincentives for formalization in terms of reducing disposable incomes and increasing poverty and inequality, and whether a hypothetical tax reform would be able to reduce the opportunity costs of formalization for informal workers, improve distributional outcomes, and increase fiscal revenues.
    Date: 2019–09–03
  8. By: Sugata Marjit; Suryaprakash Mishra; Sandip Mitra
    Abstract: We model the interaction between the informal credit market and the act of tax collection by the government; in presence and functioning of the informal credit market, the agents (the tax paying firms) engage in false or sham litigation and deferred tax payments. During the litigation period they earn higher return, higher than the punishment rates charged by the government. Proportion of false claims increases with size. In this context we get a result that contradicts conventional wisdom in tax evasion literature whereby higher tax rate actually leads to greater compliance and tax rate acts as a policy instrument even when in the standard case it does not affect evasion. We propose part-payment of the disputed amount by the tax paying firm to the government as a possible solution to the problems of excessive litigation against the government, delayed tax payments and evasion; it also has a positive impact on the tax collection of the government. Finally, we also attempt to explain as to why and how the government policies may be intentionally designed to foster the informal sector.
    Keywords: delayed tax payment, evasion, sham litigation, informal credit market
    JEL: H25 H26 H32 K34 K41 K42
    Date: 2019

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