nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2020‒11‒02
three papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality, Consumption Taxes and Redistribution By Bachas, Pierre; Gadenne, Lucie; Jensen, Anders
  2. Informal Employment in the Kabylia Region (Algeria): Labor Force Segmentation, Mobility and Earnings By Youghourta Bellache; Omar Babou; Oksana Nezhyvenko; Philippe Adair
  3. Ethnic diversity and informal work in Ghana By Sefa Awaworyi Churchill; Michael Danquah

  1. By: Bachas, Pierre (World Bank Research); Gadenne, Lucie (University of Warwick, Institute for Fiscal Studies and CEPR); Jensen, Anders (Harvard Kennedy School and NBER)
    Abstract: Can consumption taxes reduce inequality in developing countries? We combine household expenditure data from 31 countries with theory to shed new light on the redistributive potential and optimal design of consumption taxes. We use the type of store in which purchases occur to proxy for informal (untaxed) consumption. This enables us to characterize the informality Engel curve: we find that the budget share spent in the informal sector steeply declines with income, in all countries. The informal sector thus makes consumption taxes progressive: households in the richest quintile face an effective tax rate that is twice that of the poorest quintile. We extend the standard optimal commodity tax model to allow for informal consumption and calibrate it to the data to study the effects of different tax policies on inequality. Contrary to consensus, we show that consumption taxes are redistributive, lowering inequality by as much as personal income taxes. Once informality is taken into account, commonly used redistributive policies, such as reduced tax rates on necessities, have a limited impact on inequality. In particular, subsidizing food cannot be justified on equity or efficiency grounds in several poor countries.
    Keywords: Household Budget Surveys, Inequality, Informality, Redistribution, Taxes JEL Classification: E26, H21, H23, 023
    Date: 2020
  2. By: Youghourta Bellache (University of Bejaia); Omar Babou (Université of Tizi-Ouzo); Oksana Nezhyvenko (National University of Kiev Mohyla Academy, Ukraine. ERUDITE); Philippe Adair (University Paris-Est Créteil, France. ERUDITE)
    Abstract: This investigation on informal employment uses a pooled sample of 3,290 workers from two household surveys conducted at a regional level, which proves quite representative and the only one of its kind in Algeria. First, multinomial logistic regressions applied to the overall sample capture the individual determinants of access to the formal vs. informal segments of the labour market. Being a young single female with low educational attainment increases the likelihood of informal employment. Second, two subsamples show that labour market segmentation does not preclude occupational mobility of three out of five workers, which occurs most often from informal segments towards formal segments, due to age (youth), gender (female) and (low) educational attainment. Third, earnings functions analyse the determinants of wages for the subsample of 1,753 formal and informal employees (twenty per cent, among which three out of five are males). The wage gap between formal and informal employees, over twenty-five per cent, may be due to the difference in human capital and is higher among men than among women. The gender pay gap is higher in formal employment than in informal employment. Last, a decomposition model disentangles the explained and unexplained parts of the formalinformal employees segmentation (over two thirds are explained, rather from the supply-side than from the demand-side), as well as the male/female divide, whereby unexplained variables account for the highest share.
    Date: 2020–09–20
  3. By: Sefa Awaworyi Churchill; Michael Danquah
    Abstract: We present the first study that examines the effects of ethnic diversity on informal work. Using two waves of data from the Ghana Socioeconomic Panel Survey, we find that ethnic diversity is associated with a higher probability of engaging in informal work. Specifically, our instrumental variable estimates suggest that a unit increase in ethnic diversity is associated with up to a 26.3 percentage point increase in the probability of engaging in informal work. This result is robust to alternative estimation approaches and alternative ways of measuring ethnic diversity.
    Keywords: Ethnic diversity, informal work, Informality, Trust, Ghana
    Date: 2020

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