nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒09‒28
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Workforce Composition, Productivity, and Labor Regulations in a Compensating Differentials Theory of Informality By Daniel Haanwinckel; Rodrigo R. Soares
  2. Stagnant manufacturing growth in India: The role of the informal economy By Djidonou, Gbenoukpo Robert; Foster-McGregor, Neil
  3. Striking a Balance: Optimal Tax Policy with Labor Market Duality By Mbara, Gilbert; Tyrowicz, Joanna; Kokoszczynski, Ryszard
  4. Markups in a Dual Labor Market: The Case of the Netherlands By Gerrit Hugo van Heuvelen; Leon Bettendorf; Gerdien Meijerink
  5. Cash Thresholds, Cash Expenditure and Tax Evasion By Francesco Flaviano Russo
  6. Nudging for Tax Compliance: A Meta-Analysis By Armenak Antinyan; Zareh Asatryan
  7. Clearing the Bar: Improving Tax Compliance for Small Firms through Target Setting By Yazan Al-Karablieh; Evangelos Koumanakos; Stefanie Stantcheva
  8. Increasing Hours Worked: Moonlighting Responses to a Large Tax Reform By Alisa Tazhitdinova
  9. Migration and Informal Insurance By Costas Meghir; Ahmed Mushfiq Mobarak; Ahmed Corina Mommaerts; Ahmed Melanie Morten

  1. By: Daniel Haanwinckel (University of Chicago); Rodrigo R. Soares (Columbia University)
    Abstract: We develop a search model of informal labor markets with worker and firm heterogeneity, intra-firm bargaining with imperfect substitutability across types of workers, and a comprehensive set of labor regulations, including minimum wage. Stylized facts associated with the informal sector, such as smaller firms and lower wages, emerge endogenously as firms and workers decide whether to comply with regulations. Imperfect substitutability across types of workers, decreasing returns to scale, and convex vacancy-posting costs enable the model to reproduce empirical patterns incompatible with existing frameworks in the literature: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, the declining formal wage premium by skill, and the rising firm-size wage premium by skill. These features also allow us to analyze the equilibrium responses to changes in the demand and supply of different types of labor. We estimate the model using Brazilian data and show that it reproduces various margins of labor market changes observed between 2003 and 2012. The change in the composition of the labor force appears as the main driving force behind the reduction in informality. We illustrate the use of the model for policy analysis by assessing the effectiveness of a progressive payroll tax in reducing informality.
    Keywords: informality, labor market, search, minimum wage, compensating differentials, Brazil
    JEL: J24 J31 J46 J64 O17
    Date: 2020
  2. By: Djidonou, Gbenoukpo Robert (UNU-MERIT, Maastricht University); Foster-McGregor, Neil (UNU-MERIT, Maastricht University)
    Abstract: The growth of the manufacturing sector is important for overall productivity growth. Indeed, the rising importance of the manufacturing sector at early levels of development is considered one of the stylised facts of development. Recently, several developing countries have skipped this step however, with stagnant growth of the manufacturing sector. In this paper, we investigate the role of the informal segment in the stagnant growth of the manufacturing sector in the context of India. To do so, we initially compute the drag imposed by informality on the productivity growth of the manufacturing sector before investigating whether the movement of workers between the formal and informal segments of the manufacturing sector is having an impact on manufacturing productivity growth using a relatively long time series of data for the period 1980-2011. We find that the informal segment is harmful to the growth in productivity of the manufacturing sector. Using a modified shift-share analysis with the introduction of the informal segment, we find that labour reallocation to the informal segment of the manufacturing sector is growth reducing in the Indian manufacturing sector. The main source of this growth reduction is the within sub-sector structural change effect, indicating that workers move on average from productive formal to less productive informal employment within sub-sectors. In terms of movements across sub-sectors, there has been a movement towards more productive informal activities, but this has not been enough to offset the negative within sub-sector effect. Mainly, we have seen limited growth-reducing structural change after the 1994 liberalisation, implying that employment has moved to less productive informal firms after liberalisation.
    Keywords: Manufacturing, stagnation, formal economy, informal economy, productivity, worker's movement, India
    JEL: E26 L16 L60 O14 O17 O47 O53
    Date: 2020–09–08
  3. By: Mbara, Gilbert (University of Warsaw); Tyrowicz, Joanna (University of Warsaw); Kokoszczynski, Ryszard (University of Warsaw)
    Abstract: This paper develops a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers "secondary contracts". When calibrated using aggregate tax revenue data, the model delivers estimates of secondary "off the books" employment that are consistent with survey evidence for the EU14 and United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.
    Keywords: Laffer Curve, tax evasion, labor market duality
    JEL: H2 H26 H3 E13 E26 J81
    Date: 2020–08
  4. By: Gerrit Hugo van Heuvelen; Leon Bettendorf; Gerdien Meijerink
    Abstract: We follow the production function approach to assess markups, which requires the estimation of the output elasticity of a free input. In the basic setup we estimate a structural value added production function, using temporary contract hours as free input. We find rather stable markups in the Netherlands in the period 2006-2016. We show that extending the free variable incorrectly with fixed contract hours results in an increasing markup. Findings are robust to an alternative setup, in which a gross output function is specified and materials are used as free input. Implications for applied work and policy are discussed.
    Date: 2020
  5. By: Francesco Flaviano Russo (Università di Napoli Federico II and CSEF)
    Abstract: I investigate whether cash thresholds that forbid cash payments on big transactions are effective at reducing tax evasion. I find that the 1000 euros threshold implemented in Italy in 2011 induced a bigger cash expenditure reduction for the households with self employed members, and the more so in case they work in cash intensive sectors. With the help of a simple model, I show that this empirical evidence suggests a tax evasion reduction, and I compute the tax revenue increase implied by the empirical estimates. Calibrating the model, I also perform a counterfactual exercise to quantify the potential effects of lower thresholds.
    Keywords: Self-employed, Transactions, Payments
    JEL: H26 E42
    Date: 2020–09–18
  6. By: Armenak Antinyan; Zareh Asatryan
    Abstract: Tax compliance nudges are used increasingly by governments because of their perceived cost-effectiveness in raising tax revenue. We collect about a thousand treatment effect estimates from 45 randomized controlled trials, and synthesize this rapidly growing literature using meta-analytical methods. We show that interventions pointing to elements of individual tax morale are on average ineffective in curbing tax evasion (when evaluated against a control group of taxpayers receiving neutral communication). In contrast, deterrence nudges - interventions emphasizing traditional determinants of compliance such as audit probabilities and penalty rates - increase compliance. However, their effects are modest in magnitude increasing the probability of compliance by 1.5-2.5 percentage points more than non-deterrence nudges. Our additional results suggest that nudges i) work better on sub-samples of late payers and when delivered in-person, ii) are less effective in the long-run and in lower-income countries, and iii) are somewhat inflated by selective reporting of results.
    Keywords: tax compliance, randomized control trials, nudging, tax morale, meta-analysis
    JEL: C93 D91 H26
    Date: 2020
  7. By: Yazan Al-Karablieh; Evangelos Koumanakos; Stefanie Stantcheva
    Abstract: We use a new dataset consisting of the universe of Greek corporate tax returns matched to financial statements to study a voluntary tax compliance program for small firms. This “self-assessment” program prescribed target taxable profit margins for different types of activity. Firms that reported profit margins above these targets in a given year were exempt from audits in that year. We find that the firms that take-up the program report significantly larger taxable profits than non-eligible firms, with some evidence of longer-lasting effects on tax reporting. Taxable profits increase by up to 70% of their pre-program levels. We also find that firms can easily and substantially manipulate reported revenue (decreasing it by up to 40%) to help meet prescribed profit margins. Overall, the program increased tax revenues collected from small firms, but points to a very large level of baseline under-reporting of profits and the ease of manipulating reported revenues.
    JEL: H20 H25 H26
    Date: 2020–09
  8. By: Alisa Tazhitdinova
    Abstract: Moonlighting is increasingly popular in OECD countries, with 5 to 10% of workers holding two or more jobs. However, little is known about the responsiveness of moonlighting to financial incentives due to the lack of identifying variation. This paper studies a unique reform in Germany that allowed workers to hold small secondary jobs tax-free, decreasing the marginal tax rate by between 19.5 to 66pp. I show that the reform resulted in a dramatic increase in moonlighting that was not offset by reductions in primary earnings, and that hours constraints is the key determinant of moonlighting.
    JEL: H2 J01
    Date: 2020–08
  9. By: Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR, and Institute for Fiscal Studies); Ahmed Mushfiq Mobarak (Cowles Foundation, Yale University); Ahmed Corina Mommaerts (University of Wisconsin – Madison); Ahmed Melanie Morten (Stanford University and NBER)
    Abstract: Do new migration opportunities for rural households change the nature and extent of informal risk sharing? We experimentally document that randomly offering poor rural households subsidies to migrate leads to a 40% improvement in risk sharing in their villages. Our model of endogenous migration and risk sharing shows that risky and temporary migration opportunities can induce an improvement in risk sharing enabling pro?table migration. Accounting for improved risk sharing, the migration experiment increased welfare by 12.9%. However, permanent declines in migration costs improve outside options for households and can lead to reductions in risk sharing. The short-run experimental results for migration subsidies can differ from the longer-run impacts of a policy that permanently subsidizes migration.
    Keywords: Informal Insurance, Migration, Bangladesh, RCT
    JEL: D12 D91 D52 O12 R23
    Date: 2019–07

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