nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒07‒27
eleven papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Who demands labour (de)regulation in the developing world? Insiderâ??outsider theory revisited By Kanbur, Ravi; López-Cariboni, Santiago; Ronconi, Lucas
  2. Labor Market Dynamics, Informality and Regulations in Latin America By Antonio David; Samuel Pienknagura; Jorge Roldos
  3. Welfare improving tax evasion By Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
  4. Public Good Provision By Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
  5. Has the relationship between formal education and the formal employment sector in Nepal changed between 1995 and 2014? By Thomas Bolli; Ursula Renodl
  6. Microentrepreneurship in Developing Countries By Jayachandran, Seema
  7. Institutional change and political conflict in a structuralist model By Porcile, Gabriel; Sánchez-Ancochea, Diego
  8. Fertility as a Driver of Maternal Employment By Julia Schmieder
  9. Locked down and locked out: Repurposing social assistance as emergency relief to informal workers By Ihsaan Bassier; Joshua Budlender; Rocco Zizzamia; Murray Leibbrandt; Vimal Ranchhod
  10. EMEs and COVID-19: Shutting Down in a World of Informal and Tiny Firms By Laura Alfaro; Oscar Becerra; Marcela Eslava
  11. Economías emergentes y COVID-19 Cierres en un mundo de empresas informales y pequeñas By Laura Alfaro; Oscar Becerra; Marcela Eslava

  1. By: Kanbur, Ravi; López-Cariboni, Santiago; Ronconi, Lucas
    Abstract: Contrary to the predictions of the insiderâ??outsider model, we show that the large majority of outsiders in developing countries support, rather than oppose, protective labour regulations. This evidence holds across countries in different regions, across different types of protective labour regulations (i.e. severance payment, minimum wages, working time), and for different categories of outsiders (i.e. unemployed workers and employees without access to legally mandated labour benefits). We revise the economic and political assumptions of the insiderâ??outsider model, discussing their empirical relevance in a developing country context.
    Keywords: Fairness; informal; Labour; monopsony; Segmentation
    JEL: J4 J8 O17
    Date: 2020–01
  2. By: Antonio David; Samuel Pienknagura; Jorge Roldos
    Abstract: Labor markets in Latin America and the Caribbean (LAC) are characterized by high levels of informality and relatively rigid regulation. This paper shows that these two features are related and together make the speed of adjustment of employment to shocks slower, especially when regulations are tightly enforced. Evidence suggests that strict labor market regulations also have an adverse effect on medium-term growth. While both regulations on prices (minimum wages) and quantities (employment protection) decrease the speed of adjustment to shocks, they appear to be binding in different phases of the cycle—the former affects mostly the (net) job creation margin and the latter the (net) job destruction margin. The results also highlight possible interactions between labor market regulations and the effectiveness of macro-stabilization tools—including exchange rate depreciation.
    Keywords: Labor market regulations;Labor market institutions;Labor market characteristics;Labor market friction;Labor markets;Labor Market Adjustments,Informality,Latin America,WP,labor market regulation,government effectiveness,minimum wage,CCE
    Date: 2020–01–31
  3. By: Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
    Abstract: We study optimal income taxation in a framework where one's willingness to report his income truthfully is positively correlated with his type. We show that allowing low-productivity types to cheat leads to Pareto-superior outcomes as compared to deterring them, even if audits can be performed costlessly. When there is no cheating, redistribution takes place on first- and second-best frontiers and can never make low-ability types more well-off than high-ability types. Letting low-ability types cheat allows first-best redistribution up to a limit at which low-ability types are better off than high-ability types.
    Keywords: Optimal taxation, tax evasion, audits, welfare-improving.
    JEL: H20 H21 H26
    Date: 2020–07
  4. By: Chowdhury Mohammad Sakib Anwar; Alexander Matros; Sonali Sen Gupta
    Abstract: We develop a model that links tax evasion, corruption, and public good provision. In our model, citizens pay or evade taxes into the public fund, which a corrupt governor redistributes. Each citizen forms expectations about the amount of public goods the governor should provide. After observing the actual level of public goods, a citizen punishes the governor if this level is below his expectations. We describe three types of equilibria: tax evasion, efficient public good provision, and symmetric mixed-strategy. We show that the highest expectations can lead to no free riding (tax evasion) and the efficient level of public good provision even with the corrupt governor and without punishment for tax evasion.
    Keywords: Tax evasion, Audits, Embezzlement, Corruption, Sanctions, Public goods
    JEL: H40 D83 D73
    Date: 2020
  5. By: Thomas Bolli (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Ursula Renodl (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses the relationship between formal education and the formal employment sector in Nepal. The analysis of several individual-level surveys between 1995 and 2014 shows that completed tertiary education increases the probability to be wage-employed in the non- agricultural sector, while primary and secondary education has little relationship With wage- employment. However, primary, secondary and tertiary education all increase an extended measure of formal sector employment that accounts for company registration and Size. This highlights the relevance of choosing the appropriate measure of formal sector employment. The strength of the relationship between completed primary and secondary education and formal sector employment has decreased over time. This decrease provides suggestive evidence that the relative returns to formal education in the informal sector have increased, implying that the informal employment sector provides relatively more opportunities in 2014 than 20 years earlier. The relationship between tertiary education and wage-employment has also decreased but the relationship between tertiary education and the extended measure of formal sector employment has remained stable. This might reflect the large share of tertiary educated working in government related sectors.
    Date: 2019–04
  6. By: Jayachandran, Seema
    Abstract: This article reviews the recent literature in economics on small-scale entrepreneurship ("microentrepreneurship") in low-income countries. Major themes in the literature include the determinants and consequences of joining the formal sector; the impacts of access to credit and other financial services; the impacts of business training; barriers to hiring; and the distinction between self-employment by necessity and self-employment as a calling. The article devotes special attention to unique issues that arise with female entrepreneurship.
    Keywords: female entrepreneurship; Informal sector; Self-employment; small businesses
    JEL: J16 J24 L26
    Date: 2020–01
  7. By: Porcile, Gabriel; Sánchez-Ancochea, Diego
    Abstract: The article presents a theoretical model of political conflict and democratic stability in a small open developing economy, using as the basis a structuralist macroeconomic model. Political institutions are given in the medium run, but they vary in the long run as the result of political conflict between capitalists, formal workers, and informal workers excluded from the benefits of social protection conquered by the formal workers. The model suggests that a democratic breakdown is more likely the larger the informal sector, the lower the non-price competitiveness of the economy, and the weaker the country’s democratic traditions. Coups and democratization process can be both triggered by an external shock. The article claims that combining industrial and technological policies —which ease the balance-of-payments constraint— with the strengthening of social protection is key for the consolidation and stability of political democracy in developing economies.
    Date: 2020–07–01
  8. By: Julia Schmieder
    Abstract: Based on findings from high-income countries, typically economists hypothesize that having more children unambiguously decreases the time mothers spend in the labor mar- ket. Few studies on lower-income countries, in which low household wealth, informal child care, and informal employment opportunities prevail, find mixed results. Using Mexican census data, I find a positive effect of an instrument-induced increase in fertility on maternal employment driven by an increase in informal work. The presence of grandparents and low wealth appear to be important. Econometric approaches that allow extrapolating from this complier-specific effect indicate that the response in informal employment is non-negative for the entire sample.
    Keywords: Fertility, Female Labor Supply, Middle-Income Countries, Informality
    JEL: J13 J16 J22 J46
    Date: 2020
  9. By: Ihsaan Bassier (University of Massachusetts Amherst); Joshua Budlender (University of Oxford); Rocco Zizzamia (School of Economics and SALDRU, University of Cape Town); Murray Leibbrandt (School of Economics and SALDRU, University of Cape Town); Vimal Ranchhod (School of Economics and SALDRU, University of Cape Town)
    Abstract: The COVID-19 pandemic presents a particular challenge to countries with high levels of labour market informality. Informal workers and their households are especially vulnerable to the negative economic consequences of the pandemic and associated lockdown measures, while the very fact of their informality makes it difficult for governments to quickly provide targeted economic relief. Using South Africa as a case study, we examine how an established social assistance system - not originally designed to support informal workers - can be re-purposed to provide emergency relief to these workers and their households. We examine how expansions of this system on the intensive margin (increasing the value of existing social grants) and extensive margin (introducing a new feasibly-implemented grant) can be used to mitigate this COVID-19-associated poverty. We compare the efficacy of the different policies by using pre-pandemic nationally representative household survey data to project how a negative shock to informal incomes can be mitigated by the different social grant measures, with a particular emphasis on poverty impacts. We find that an intensive-margin expansion of the existing Child Support Grant is complementary to the extensive-margin introduction of a new Special COVID-19 Grant and that this combined policy intervention performs best out of the options considered. However, conclusions as to this "optimal policy" are not simple technical determinations. We show that these conclusions are in fact sensitive to both unavoidable technical assumptions about how resources are consumed and shared within the household, as well as to normative value judgments about which populations to prioritise. While our approach helps identify a range of sensible policy approaches, there is no escaping the limits to our knowledge or the issue of normative goals.
    Keywords: social policy, informal employment, COVID-19, South Africa
    Date: 2020
  10. By: Laura Alfaro; Oscar Becerra; Marcela Eslava
    Abstract: Emerging economies are characterized by an extremely high prevalence of informality, small-firm employment and jobs not fit for working from home. These features factor into how the COVID-19 crisis has affected the economy. We develop a framework that, based on accounting identities and actual data, quantifies potential job and income losses during the crisis and recovery for economies with different economic organization structures. Our analysis incorporates differential exposure of jobs across categories of firm-size and formality status, as well as sectors and occupations. We account for the direct supply shock caused by lockdowns, the idiosyncratic demand shock suffered by sectors that rely on high contact with their costumers, the transmission of both shocks through IO linkages, and the overall aggregate demand effect derived from these shocks. Applying our framework to data for Colombia, which exhibits an employment distribution similar to that of other emerging market countries, in particular Latin America, we find that well over 50% of jobs are at risk in the initial stages of the crisis. Because informal jobs and those not fit for telework are at higher risk, this number goes down to 33% if the US employment distribution is imposed on the Colombian data. As the crisis deepens, the risk of unemployment grows. However, informality rebounds quickly in the recovery, an employment at risk is quickly reduced to 20% of the baseline, all concentrated in formal jobs. Our findings point to the importance of action to maintain formal matches from dissolving, given their scarcity and rebuilding difficulty, while protecting the poor and the informal via income transfers.
    JEL: F0 O17 O20 O47
    Date: 2020–06
  11. By: Laura Alfaro; Oscar Becerra; Marcela Eslava
    Abstract: Las economías emergentes se caracterizan por una alta prevalencia de informalidad, empleo en pequeñas empresas y trabajos no aptos para trabajar desde casa. Estas características influyen en cómo la crisis del COVID-19 afecta a la economía. Desarrollamos un marco analítico que, basado en identidades contables y datos reales, cuantifica las pérdidas potenciales de empleo e ingresos durante periodos de crisis y de recuperación en economías con distintas estructuras de organización económica. Nuestro análisis incorpora exposición diferencial del empleo a través de categorías de tamaño de empresa y estatus de formalidad, as´? como de sectores y ocupaciones. Tenemos en cuenta el choque de oferta directo generado por los cierres, el choque idiosincrásico de demanda que afecta sectores que dependen de interacciones de alto contacto con los consumidores, la trasmisión de estos dos choques a través de encadenamientos productivos, y el efecto en la demanda agregada que se deriva de estos choques. Aplicando nuestro análisis a los datos de Colombia, que exhibe una distribución del empleo similar a la de otras economías emergentes, en particular de América Latina, encontramos que más de 50 % de los empleos están en riesgo en las etapas iniciales de la crisis. Debido a que los trabajos informales y aquellos que no son aptos para el teletrabajo están en mayor riesgo, este numero ´ se reduce a 33 % si se impone la distribución del empleo de Estados Unidos a los datos colombianos. A medida que la crisis se profundiza aumenta el riesgo de desempleo. Sin embargo, los empleos informales repuntan rápidamente durante las etapas de recuperación y los empleos en riesgo se reducen a 20 % de los empleos iniciales, todos concentrados en el sector formal. Nuestros hallazgos destacan la importancia de acciones para evitar la disolución de vínculos formales, dada su escasez y la dificultad de la reconstrucción de ´estos, al tiempo que se protege a los más vulnerables y a los informales a través de transferencias monetarias.
    Keywords: COVID-19, economías emergentes, informalidad, distribución de tamaño de empresa, América Latina
    JEL: F0 O47 O20 O17
    Date: 2020–06–12

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