nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2021‒02‒01
twelve papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Informality, Frictions, and Macroprudential Policy By Moez Ben Hassine; Nooman Rebei
  2. Informality, labour transitions, and the livelihoods of workers in Latin America By Roxana Maurizio; Ana Paula Monsalvo
  3. Informality and Aggregate Productivity: The Case of Mexico By Jorge Alvarez; Cian Ruane
  4. The Informal Economy and Collective Cooperation in India: Lessons from Ela Bhatt By Pravin Sinha
  5. Scrutinizing the sticky floor/glass ceiling phenomena in the informal labour market in Cameroon: An unconditional quantile regression analysis By Ebenezer Lemven Wirba; Fiennasah Annif' Akem; Francis Menjo Baye
  6. Making Ends Meet: The Role of Informal Work in Supplementing Americans’ Income By Katharine G. Abraham; Susan N. Houseman
  7. Who does and doesn’t pay taxes? By Advani, Arun
  8. Hidden Treasure: The Impact of Automatic Exchange of Information on Cross-Border Tax Evasion By Sebastian Beer; Maria Delgado Coelho; Sebastien Leduc
  9. A General Equilibrium Model of Value Added Tax Evasion: An Application to Pakistan By Andrew Feltenstein; Jorge Martinez-Vazquez; Biplab Datta; Sohani Fatehin
  10. Do tax administrative interventions targeted at small businesses improve tax compliance and revenue collection?: Evidence from Ugandan administrative tax data By Maria Jouste; Milly I. Nalukwago; Ronald Waiswa
  11. Drivers of Financial Access: the Role of Macroprudential Policies By Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
  12. Temporary International Migration, Shocks and Informal Insurance: Analysis using panel data By Chakraborty, Tanika; Pandey, Manish

  1. By: Moez Ben Hassine; Nooman Rebei
    Abstract: We analyze the effects of macroprudential policies through the lens of an estimated dynamic stochastic general equilibrium (DSGE) model tailored to developing markets. In particular, we explicitly introduce informality in the labor and goods markets within a small open economy embedding financial frictions, nominal and real rigidities, labor search and matching, and an explicit banking sector. We use the estimated version of the model to run welfare analysis under optimized monetary and macroprudential rules. Results show that although informality reduces the efficiency of macroprudential policies following a convex fashion, combining the latter with an inflation targeting objective could be beneficial.
    Keywords: Macroprudential policy;Self-employment;Banking;Consumption;Housing;WP,interest rate,monetary policy
    Date: 2019–11–27
  2. By: Roxana Maurizio; Ana Paula Monsalvo
    Abstract: This paper studies the incidence and heterogeneity of labour informality in six Latin American countries?Argentina, Brazil, Ecuador, Mexico, Paraguay, and Peru. We divide workers into five work statuses: formal wage-employed, formal self-employed, upper-tier informal wage-employed, lower-tier informal wage-employed, and informal self-employed. We evaluate the patterns of the occupational turnover between these work statuses and assess their impact on wage dynamics. In all the countries, wages are highest for formal workers and lowest for lower-tier informal jobs.
    Keywords: Informality, Occupational turnover, Education, Wages, Latin America, Occupations, Occupational mobility, Occupational choice
    Date: 2021
  3. By: Jorge Alvarez; Cian Ruane
    Abstract: We assess the aggregate productivity impact of distortions arising from labor regulations in Mexico and how they interact with informality. Using employment surveys and a firm-level economic census, we document a number of novel features about informal firms in Mexico. We then construct and estimate a model of heterogeneous firms and endogenous informality to study the micro and macro impacts from various policy reforms. Some reforms may have large impacts on informal employment but small impacts on aggregate productivity.
    Keywords: Informal employment;Productivity;Labor;Wages;Public expenditure review;WP,informal firm,size distribution,profit function,firm's idiosyncratic productivity,incumbent firm
    Date: 2019–11–27
  4. By: Pravin Sinha
    Abstract: Increasing informality and inequality have been recognised as the two primary outcomes of the twenty-first century globalisation. With growing intensity of the two problems, the world seems to be returning to the nineteenth-century precarious conditions in the world of work. Absence of judiciable status of the worker in informal economy has caused widespread violations of workers’ rights. Consequently, all the protective legislations and ILO standards have failed to extend the desired protection to informal workers, amongst whom the presence of women is dominant, more so in countries of the Global South. Mahatma Gandhi’s philosophy of ‘Trusteeship’ functional on the principle of classless cooperation that has proved successful, particularly among women self-employed workers, needs to be examined and emulated. The practice of ‘collective cooperation’ as against ‘collective bargaining’ has not only led to the establishment of harmonious relationship between capital and labour, but has also enabled the SEWA entrepreneurs to work towards securing decent conditions of work with justifiable returns. As collective bargaining is the central principle of social dialogues in a formal economy, collective cooperation ought to become the basic rule for informal economy.
    Date: 2021–01
  5. By: Ebenezer Lemven Wirba; Fiennasah Annif' Akem; Francis Menjo Baye
    Abstract: Cameroon's informal labour market largely harbours female workers, engaged mainly in low-productivity and low-paying jobs. We investigate the sticky floor and glass ceiling phenomena in the informal labour market as a whole and across its segments. We use the 2010 Cameroon labour market survey, employing the recentred influence function and blending the Oaxaca-Ransom and Neuman-Oaxaca decomposition methods.
    Keywords: Gender, Earnings inequality, Sticky floor, Glass ceiling, Unconditional quantile regression, Cameroon, Wage gap, Gender gap
    Date: 2021
  6. By: Katharine G. Abraham (University of Maryland); Susan N. Houseman (W.E. Upjohn Institute)
    Abstract: Data from the Survey of Household Economics and Decisionmaking indicate that, over the course of a month, more than one-quarter of adults engage in some informal work outside of a main job. Of these, about two-thirds say that they do informal work to earn money and about one-third say that informal work is an important source of household income. Informal work plays a particularly important role in the household finances of minorities, the less educated, those experiencing financial hardship, those who work part time involuntarily, independent contractors, and the unemployed. Aggregate earnings from informal work are modest but help many households to make ends meet. Informal work cannot compensate, however, for the lack of benefits typical of part-time and contractor work.
    Keywords: informal work, gig work, independent contractors, income adequacy
    JEL: J46 J48
    Date: 2019–11
  7. By: Advani, Arun (University of Warwick, CAGE, and IFS)
    Abstract: We use administrative tax data from audits of self-assessment tax returns to understand what types individuals are most likely to be non-compliant. Non-compliance is common, with one-third of taxpayers underpaying by some amount, although half of aggregate under-reporting is done by just 2% of taxpayers. Third party reporting reduces non-compliance, while working in a cash-prevalent industry increases it. However, compliance also varies significantly with individual characteristics: non-compliance is higher for men and younger people. These results matter for measuring inequality, for understanding taxpayer behaviour, and for targeting audit resources.
    Date: 2020
  8. By: Sebastian Beer; Maria Delgado Coelho; Sebastien Leduc
    Abstract: We analyze the impact of exchange of information in tax matters in reducing international tax evasion between 1995 and 2018. Based on bilateral deposit data for 39 reporting countries and more than 200 counterparty jurisdictions, we find that recent automatic exchange of information frameworks reduced foreign-owned deposits in offshore jurisdictions by an average of 25 percent. This effect is statistically significant and, as expected, much larger than the effect of information exchange upon request, which is not significant. Furthermore, to test the sensitivity of our findings, we estimate countries’ offshore status and the impact of information exchange simultaneously using a finite mixture model. The results confirm that automatic (and not upon request) exchange of information impacts cross-border deposits in offshore jurisdictions, which are characterized by low income tax rates and strong financial secrecy.
    Keywords: Tax evasion;Anti-money laundering and combating the financing of terrorism (AML/CFT);Banking;Offshore financial centers;Bank deposits;WP,bank deposit,EOI agreement
    Date: 2019–12–20
  9. By: Andrew Feltenstein (Department of Economics, Georgia State University, USA); Jorge Martinez-Vazquez (International Center for Public Policy, Georgia State University, USA); Biplab Datta (Institute of Public and Preventive Health, Augusta University, USA); Sohani Fatehin (Department of Economics, Dickinson College, USA)
    Abstract: Value added taxes (VAT) constitute a major share of tax revenues in developing countries in which tax evasion is widespread. The literature on VAT evasion, however, is limited. This paper develops a computable general equilibrium framework for analyzing endogenous VAT tax evasion. The analytical framework entails increasing enforcement through greater spending on the enforcement of tax revenue collection. We assume that there is an elasticity that connects the changes in enforcement to actual increases in VAT collection. We apply the model to Pakistan data and show the level of enforcement spending required to achieve certain VAT collection targets. We also examine the short-, medium-, and long-term macroeconomic outlooks, and real consumption distribution across household economic groups associated with higher enforcement spending. We calibrate the model using 2016 as the base year and then run the dynamic model forward for 20 years. We define the implicit VAT rate as that hypothetical statutory rate that, in the absence of evasion, would approximately generate the observed VAT collection. We assume zero additional spending on enforcement in the baseline and estimate two alternative scenarios of VAT revenue target of 8% and 15% of the GDP. The alternative scenarios require increase in enforcement spending by a compounded 46.4% and 322.4%, respectively. We find that the increased enforcement spending enhances the sustainability of the government’s budget deficit without causing a decline in real GDP over the long-term. The interest and inflation rates are also lowered. However, there is a small regressive impact on households’ real consumption.
    Date: 2021–01
  10. By: Maria Jouste; Milly I. Nalukwago; Ronald Waiswa
    Abstract: This paper conducts an impact evaluation of the effects of two tax administration interventions?a taxpayer register expansion and education programme, and a new electronic filing system for presumptive tax?on the number of small business taxpayers and presumptive tax revenues in Uganda.
    Keywords: Tax administration, Small business, Tax compliance, Electronic filing, Impact evaluation, Administrative data, Tax administration data
    Date: 2021
  11. By: Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
    Abstract: This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals’ choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals’ choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion.
    Keywords: Financial services;Financial inclusion;Mobile banking;Macroprudential policy;Macroprudential policy instruments;WP,informal financial service
    Date: 2020–05–29
  12. By: Chakraborty, Tanika; Pandey, Manish
    Abstract: We use panel data for rural Kyrgyzstan to examine households' international migration response when faced with shocks. Using a household fixed effects regression model, we find that while a drought shock increases the likelihood of migration, winter and earthquake shocks reduce the likelihood of migration. We use a simple theoretical framework to illustrate the trade-off between two effects of a shock for a household: loss of income and increase in the need of labor services. We show that migration increases when the former effect of a shock dominates, it reduces when the latter effect dominates. We explore these mechanisms by examining how the migration-response to shocks changes in the presence of alternate coping mechanisms and by evaluating the effect of shocks on a household's decision to send and recall a migrant member. We find that when households have easier access to informal finance the migration-response is muted only for shocks for which the adverse income effect dominates. Our findings also suggest that while shocks for which the loss of income effect dominates have a greater effect on the decision to send a migrant, shocks for which the need of labor services effect dominates only affect the decision to recall a migrant. These findings provide evidence in favor of the proposed mechanisms through which shocks affect temporary migration.
    Keywords: Temporary migration,shocks,insurance,informal finance,Asia,Kyrgyzstan
    JEL: J61 O15 O16
    Date: 2021

This nep-iue issue is ©2021 by Catalina Granda Carvajal. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.