nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒05‒18
ten papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Labor Market Search, Informality, and On-The-Job Human Capital Accumulation By Matteo BOBBA
  2. Female participation in the labour market: The case of the informal sector in Kenya By Rosemary Atieno
  3. Life Cycle, Financial Frictions and Informal Labor Markets: The Case of Chile By Enrique Kawamura; Damián Pierri
  4. Optimal age-dependent taxation in emerging markets: A quantitative assessment By Uribe-Tera\x{0301}n, Carlos; Gachet, Iva\x{0301}n; Grijalva, Diego F.
  5. Ghosts in the Income Tax Machinery By Erard, Brian; Langetieg, Patrick; Payne, Mark; Plumley, Alan
  6. The corporate income tax gap in South Africa: A top-down approach By Ada Jansen; Winile Ngobeni; Alexius Sithole; Wynnona Steyn
  7. Sampling risk evaluations in a tax fraud case: Some modelling issues By Lillestøl, Jostein
  8. Formalising informal cross-border trade: Evidence from One-Stop-Border-Posts in Uganda By Jade Siu
  9. Un piso de protección social para preservar la vida: informalidad, pobreza y vulnerabilidad en tiempos de COVID-19 By Roberto Mauricio Sánchez Torres; ergio Chaparro Hernández
  10. Impacto en el mercado laboral de las medidas de aislamiento para combatir el COVID-19 By Cristina Fernández

  1. By: Matteo BOBBA
    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.
    JEL: Q
    Date: 2019–02–08
  2. By: Rosemary Atieno (Institute for Development Studies University of Nairobi)
    Abstract: The informal sector has become increasingly important as a source of income and employment in Kenya. This contrasts with the declining performance of the formal sector, and underscores the sector’s potential for absorbing the country’s increasing labour force as more households become dependent on it. One important attribute of the sector is that it has become a major employer of the female labour force in the country. This study investigated the factors determining the participation of women in informal sector activities given a range of other available labour market options. The results show that education is one of the important factors determining women’s participation in the different categories of the labour market. The study concludes that efforts to address the problem of women’s access to the labour market should focus on improving their access to education as one of the important factors for improving their human capital. Given the nature of the informal sector, and the fact that access to the labour market is an outcome of the interaction between demand and supply, addressing female participation in the sector may require addressing the demand side of the Kenyan labour market in addition to the factors expected to explain labour market participation
  3. By: Enrique Kawamura (Universidad de San Andres); Damián Pierri (Universidad de San Andres & IIEP-BAIRES (UBA-CONICET))
    Abstract: In this paper we study the implications of economic policies that affect household’s income. We focus on Chile after the massive demonstrations against the existing standard of living observed in 2019. Using a search model with life-cycle features and survey data, we found that an equivalent change in labor tax rates and non-contributary pensions have opposite effects on labor markets, specifically on informality and unemployment duration. Non-contributary pensions offers a milder trade-off as it produces a second order increase in informality. However, due to the presence of informal labor markets and financial frictions, non-retired agents increase their current consumption only after a tax cut. That is, in this framework, a positive wealth shock can reduce consumption. Thus, when we take into account the impact on welfare, as households are assumed to value only consumption, cutting taxes seems to be preferred. We characterize labor market and consumption-savings decisions. We found 2 effects operating simultaneously and in opposite directions: substitution and wealth. Due to the presence of risk averse agents and incomplete capital markets, the latter prevails suggesting that the life cycle aspects of the labor market are critical to understand policy trade-offs.
    Keywords: search models, life-cycle, simulation-based estimation, social-security reform.
    JEL: E21 E24 E26 E64
    Date: 2020–05
  4. By: Uribe-Tera\x{0301}n, Carlos; Gachet, Iva\x{0301}n; Grijalva, Diego F.
    Abstract: This paper studies the design and welfare implications of an optimal age-dependent taxation scheme for an emerging economy. The setting is an overlapping generations economy with uninsured productivity risk, partially insured occupational risk (unemployment and informality by exclusion), stochastic retirement, and stochastic access to the pension fund. We calibrate this model for Ecuador and find that the optimal tax scheme provides a payroll tax exemption up to age 35, thereafter becoming hump-shaped with a maximum tax rate of 50% at age 50. The progressive tax levied on labor income implies an initial marginal tax rate of 5% that increases linearly to a top marginal tax rate of 35%. This tax scheme produces a welfare gain of 2.9% measured in compensated equivalent units and reduces wealth inequality by 5.8%. For comparison, in a model built and calibrated for the US economy (no informality, higher productivity and longevity risk, and full coverage of the social security system), the optimal payroll tax implies a zero tax rate up to age 27, becoming hump-shaped thereafter with a maximum tax rate of 56.2% at age 46.
    Keywords: Economía, Finanzas, Impuestos,
    Date: 2019
  5. By: Erard, Brian; Langetieg, Patrick; Payne, Mark; Plumley, Alan
    Abstract: Much of the tax compliance literature focuses on taxpayers who choose to underreport their income when they file their tax returns. In this paper, we instead concentrate on those individuals who take the ultimate compliance shortcut of not filing a return at all – a group commonly referred to as “ghosts” by academics, tax administrators, and policy-makers. To learn more about this relatively understudied population, we undertake a detailed analysis of administrative data and Census survey data spanning the period from 2001 through 2013. Our results indicate that 10-12 percent of taxpayers with a US federal filing requirement fail to submit a timely income tax return in any given year, and 6.5-8 percent never file at all. The federal tax gap associated with these ghosts is substantial, amounting to an estimated $37 billion per year. We employ a novel pooled time-series cross-sectional econometric methodology to examine the drivers of late filing and nonfiling behavior. The results establish that filing compliance is influenced by income visibility as well as financial incentives, such as refundable credits, tax rebates, and the monetized filing burden. In addition, we find strong evidence of socio-economic and demographic influences. Our results also reveal substantial persistence in filing behavior. The estimated likelihood of filing a timely return for the current tax year is estimated to be 45 percentage points higher if the taxpayer filed a return for the preceding year. At the same time, we find that one-time financial incentives have only a temporary impact on filing compliance, overturning the prevailing view that, once an individual is brought into the tax system, that individual will continue to file in subsequent years.
    Keywords: Tax Compliance, Tax Evasion, Nonfilers, Ghosts, Income Tax, Qualitative Response Models, Discrete Choice Analysis
    JEL: C35 H24 H26 H31
    Date: 2020–05–02
  6. By: Ada Jansen; Winile Ngobeni; Alexius Sithole; Wynnona Steyn
    Abstract: A key objective of many governments is to improve tax revenue mobilization. One way to achieve this is by improving tax compliance. This requires accurate knowledge of the tax gap, i.e. the difference between what should be paid and what is actually paid. Until now, tax gaps have been primarily estimated in developed countries, and very little is known about tax gaps in developing countries. Information about these gaps can help policy makers make appropriate revenue mobilization strategies. This paper uses a top-down approach to estimate the tax gap in corporate income tax in South Africa.
    Keywords: corporate income tax, Tax compliance, tax gap, top-down approach
    Date: 2020
  7. By: Lillestøl, Jostein (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This work is a follow-up to Lillestøl (2019). The context is the use of sample data to support claims of tax fraud at eateries, where the possibilities of embezzlement are overreporting of take-away sales and underreporting of cash payments. Ratios of sales amounts of opposing types are computed from the sample and used as estimates for the true yearly ratios. Decisions are made by comparison with the reported ratios in the taxpayer’s yearly income statement, allowing for sampling risk. To this end, a “risk distribution” is established and its quantiles used as decision limits. There are different ways of doing the calculation and to establish the accompanying risk distribution, among them models based on Gamma-assumptions, as detailed in Lillestøl (2019). They may lead to different results, more or less favorable to the taxpayer. The chosen method therefore must be fair and defensible. In this connection, some relevant issues have surfaced, mainly related to independence and conditioning. The objective of this paper is to explore these issues and provide some recommendations on the choice of method.
    Keywords: Gamma-Beta analysis; Bayesian Gamma-analysis; Risk analysis; Beta-prime distribution; Random arrival models
    JEL: C00 C10 C11 C13
    Date: 2020–05–13
  8. By: Jade Siu (University of Birmingham)
    Abstract: Informal trade is pervasive between sub-Saharan African countries. This study examines the extent to which the value of informal trade changes as a result from a change in the costs of trade. More specifically, I exploit time and custom point variation in the introduction of border facilities, aimed at reducing border delays and corruption. I find that the ratio of informal to total trade values between Uganda and its neighbours is reduced only in the quarter when the border facilities are introduced. By using an original data set collected at two border towns between Kenya and Uganda, I examine whether this result can be explained by formalisation of cross-border traders. I find that few traders formalise despite the reduced costs associated with trading formally, and that trade costs and border crossing choices are not only associated with export restrictions, but are also gendered.
    Date: 2020–05
  9. By: Roberto Mauricio Sánchez Torres; ergio Chaparro Hernández
    Abstract: Este texto analiza el potencial impacto del coronavirus y las medidas para mitigarlo sobre la pobreza en las 13 principales ciudades de Colombia producto de la parálisis de la economía informal. Con base en una simulación basada en la Gran Encuesta Integrada de Hogares, se estima que, aún en presencia de las medidas tomadas por el gobierno nacional para apoyar a la población de menores ingresos, la tasa de pobreza pasaría de 18% a 32% y la pobreza extrema de 4,5% a 16,7%, como consecuencia de la pérdida de ingresos laborales en el sector informal de alrededor de 4,1 millones de personas. A partir de simular los incrementos en las transferencias que serían necesarios para evitar un aumento de la pobreza, se discuten los méritos de algunas propuestas de política planteadas por expertos, instituciones académicas y organizaciones de la sociedad civil. El artículo propone la necesidad de adoptar un esquema de renta básica de emergencia como primer componente de un piso de protección social basado en derechos, el cual debería mantenerse más allá de la emergencia como un aprendizaje esencial de esta crisis. *** This paper analyzes the potential impact of COVID-19 and contention measures on poverty in the 13 main cities of Colombia as a result of the paralysis of the informal economy. Drawing on a simulation with data from household surveys (GEIH), it is estimated that, despite current governmental emergency transfers to support households, poverty rate has increased from 18% to 32% and extreme poverty from 4.5% to 16.7%, as a consequence of a suddenly interruption of labor income earning of around 4.1 million informal workers. Based on an estimation of the amount of monetary transfers required to avoid any increasement in poverty, the paper discusses the merits of some policy proposals made by experts, academic institutions and civil society organizations. The article argues for the need to adopt an emergency basic income scheme as the first component of a rights-based social protection floor which should remain in place beyond the public health emergency, as an essential learning from this crisis.
    Keywords: Coronavirus, Informalidad laboral, pobreza, protección social
    Date: 2020–05–07
  10. By: Cristina Fernández
    Abstract: Este artículo analiza el efecto sobre el empleo de las medidas de aislamiento para enfrentar el contagio del COVID-19 en las dos etapas de la cuarentena que se han presentado -a partir del 24 de marzo y a partir del 27 de abril-. Para realizar este análisis se consideran tres aspectos fundamentales: 1) si el sector/actividad fue declarado como prioritario el 24 de marzo o el 24 de abril; 2) si el sector/ actividad es susceptible de ser realizada a distancia y 3) si el sector/actividad funciona de manera independiente o asalariada y formal o informal.
    Keywords: Mercado Laboral, COVID-19, Coronavirus, Empleo, Colombia, Labor Market, COVID-19, Employment
    JEL: J40 E24
    Date: 2020–04–27

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