nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒02‒14
fourteen papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Trade and informality in the presence of labor market frictions and regulations By Rafael Dix-Carneiro; Pinelopi Koujianou Goldberg; Costas Meghir; Gabriel Ulyssea
  2. Corruption, Economic Growth and the Informal Sector: Empirical Evidence from Developing Countries By Ibrahim Ngouhouo; Loudi Njoya; Simplice A. Asongu
  3. Mobile money adoption and entrepreneurs’ access to trade credit in the informal sector By Tetteh, Godsway Korku; Goedhuys, Micheline; Konte, Maty; Mohnen, Pierre
  4. The role of economic prosperity on informality in Africa: evidence of corruption thresholds from PSTR By Loudi Njoya; Ibrahim Ngouhouo; Simplice A. Asongu; Friedrich Schneider
  5. An Integrative Framework for Formal and Informal Entrepreneurship Research in Africa By Richard Adu-Gyamfi; John Kuada; Simplice A. Asongu
  6. Enforcement of labor regulation and the labor market effects of trade: evidence from Brazil By Vladimir Ponczek; Gabriel Ulyssea
  7. Spatial Wage Curves for Formal and Informal Workers in Turkey By Badi H. Baltagi; Yusuf Soner Başkaya
  8. The minimum wage, informal pay and tax enforcement By Anikó Bíró; Daniel Prinz; László Sándor
  9. The role of reporting institutions and image motivation in tax evasion and incidence By Kaisa Kotakorpi; Satu Metsälampi; Topi Miettinen; Tuomas Nurminen
  10. Skipping Out On The Check: Institutional Quality, Tax Evasion, And Individual Preferences For Social Policy By Israel Marques II
  11. Financial development and small firms’ tax compliance in Sub-Saharan Africa By Balde, Racky
  12. Chasing the Shadow: the Evaluation of Unreported Wage Payments in Latvia By Konstantins Benkovskis; Ludmila Fadejeva
  13. Impact of Microcredit on Labour Migration Decisions: Evidence from a Cambodian Household Survey By Chan Mono Oum; Gazi M. Hassan; Mark J. Holmes
  14. Demand-led industrialisation policy in a dual-sector small balance of payments constrained economy By Nomaler, Önder; Spinola, Danilo; Verspagen, Bart

  1. By: Rafael Dix-Carneiro (Institute for Fiscal Studies and Duke University); Pinelopi Koujianou Goldberg (Institute for Fiscal Studies and Yale University); Costas Meghir (Institute for Fiscal Studies and Yale University); Gabriel Ulyssea (Institute for Fiscal Studies)
    Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an “unemployment," but not a “welfare buffer" in the event of negative economic shocks.
    Date: 2021–01–21
  2. By: Ibrahim Ngouhouo (University of Dschang, Cameroon); Loudi Njoya (University of Dschang, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The main objective of this paper is to contribute to in-depth literature on the relationship between growth and the informal sector in the presence of corruption. The impact of the interaction between growth and corruption on economic performance (increase or decrease of the informal sector) will be discussed. To the best of our knowledge, our paper is unique in the empirical literature because it studies the effect of the interaction between growth and corruption in the informal sector using a sample of developing countries. Our results based on the FE, system GMM, MG, AMG, and IV-2SLS for 112 countries between the 1991-2015 periods, show that growth reduces informality in the direct effect regression. Moreover, economic growth interacts with corruption and produces negative net effects up to a corruption threshold of 4.79745 when this effect is nullified. This negative net effect was found to be robust across different regional groupings and income groups except in the Middle East and North Africa (positive net effect) and high income and upper-middle-income countries (only direct effects) producing different thresholds per sample. The study recommends that policymakers should intensify their fight against corruption in their quest to reduce the size of the informal economy.
    Keywords: Informal sector, Growth, Corruption, Developing countries
    JEL: D73 F47 J46 O1 O17 O47
    Date: 2022–01
  3. By: Tetteh, Godsway Korku (UNU-MERIT, Maastricht University); Goedhuys, Micheline (UNU-MERIT, Maastricht University); Konte, Maty (UNU-MERIT, Maastricht University, and Barnard College, Columbia University); Mohnen, Pierre (UNU-MERIT, Maastricht University)
    Abstract: Despite the contribution of previous studies to unravel the implications of mobile money in the developing world, the effect of this innovation on an important source of external finance, trade credit, has not been properly accounted for particularly in the informal sector. Using the 2016 FinAccess Household Survey, we investigate the relationship between mobile money adoption and the probability to receive goods and services on credit from suppliers based on a sample of entrepreneurs who operate informal businesses. We further explore the effect of mobile money adoption on the likelihood to offer goods and services on credit to customers. Our estimations suggest that entrepreneurs with mobile money are more likely to receive goods and sesrvices on credit from suppliers. We also find a positive and significant relationship between mobile money adoption and the likelihood to offer goods and services on credit to customers. The evidence supports the promotion of mobile money adoption among entrepreneurs in the informal sector to facilitate access to credit.
    Keywords: Entrepreneurship, Financial Innovation, Mobile Money, Trade Credit
    JEL: D14 G21 L26 O16 O33
    Date: 2021–11–17
  4. By: Loudi Njoya (University of Dschang, Cameroon); Ibrahim Ngouhouo (University of Dschang, Cameroon); Simplice A. Asongu (Yaoundé, Cameroon); Friedrich Schneider (Kepler University of Linz, Austria)
    Abstract: This paper is interested in explaining the causes of the simultaneous evolution between economic growth and informality. Using a large annual panel of African countries with a time series of 25 years, ours results show that when the corruption rate is above (below) a threshold of 1.3577, economic growth reduces (increases) informal economic sector. The corruption proxy is measured as a decreasing function of corruption such that higher levels of the corruption proxy translate lower levels of corruption. It is therefore desirable for policymakers to improve the transparency of interactions between firms, public and private agents to fight corruption, in view of decreasing the informal economic sector through economic growth.
    Keywords: Informal sector, Growth, Corruption, African countries
    JEL: D73 F47 J46 O1 O17 O47
    Date: 2022–01
  5. By: Richard Adu-Gyamfi (Research Africa Network, Botswana); John Kuada (Aalborg University, Denmark); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: It is a well-established practice of many Sub-Sahara African (SSA) governments to aid entrepreneurs within both the formal and informal sectors in order to enhance their performance and growth. Unfortunately, there is no agreed method by which governments can differentiate between entrepreneurs and target them with the appropriate promotion policies. Thus, despite the good intentions, entrepreneurship policy initiatives have been incorrectly targeted, poorly implemented and without the desired results, since different entrepreneurs may require different forms of assistance. Some scholars have suggested that without a context-specific classificatory guide, policymakers are unlikely to be accurate in their assessment of the growth capabilities of prospective candidates for specific promotion initiatives and this can explain some of the policy failures. This observation has motivated the present paper. Our objective is to provide a framework that helps identify the different contextual dimensions influencing formal and informal enterprise creation processes in SSA.
    Keywords: entrepreneurship; formal; informal; Africa
    Date: 2022–01
  6. By: Vladimir Ponczek (Institute for Fiscal Studies); Gabriel Ulyssea (Institute for Fiscal Studies)
    Abstract: How does enforcement of labor regulations shape the labor market effects of trade? Does the informal sector introduce greater de facto flexibility, reducing employment losses during bad times? To tackle these questions, we exploit local economic shocks generated by trade liberalization and variation in enforcement capacity across local labor markets in Brazil. In the aftermath of the trade opening, regions with stricter enforcement observed: (i) lower informality effects; (ii) larger losses in overall em-ployment; and (iii) greater reductions in the number of formal plants. Regions with weaker enforcement observed opposite effects. All these effects are concentrated on low-skill workers. Our results indicate that greater de facto labor market flexibility introduced by informality allows both formal firms and low-skill workers to cope better with adverse labor market shocks.
    Date: 2021–03–23
  7. By: Badi H. Baltagi (Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244); Yusuf Soner Başkaya (Adam Smith Business School, University of Glasgow, G12 8QQ, Glasgow, UK)
    Abstract: This paper estimates spatial wage curves for formal and informal workers in Turkey using individual level data from the Turkish Household Labor Force Survey (THLFS) provided by TURKSTAT for the period 2008-2014. Unlike previous studies on wage curves for formal and informal workers, we extend the analysis to allow for spatial effects. We also consider household characteristics that would affect the selection into formal employment, informal employment, and non-employment. We find that the spatial wage curve relation holds both for formal and informal workers in Turkey for a variety of specifications. In general, the wages of informal workers are more sensitive to the unemployment rates of the same region and other regions than formal workers. We find that accounting for the selection into formal and informal employment affects the magnitudes but not the significance of the spatial wage curves for the formal and informal workers with the latter always being larger in absolute value than that for formal workers.
    Keywords: Spatial Wage Curve, Spatial Weights, Regional Labor Markets, Informal Labor Markets
    JEL: C21 J30 J60
    Date: 2022–02
  8. By: Anikó Bíró (Institute for Fiscal Studies); Daniel Prinz (Institute for Fiscal Studies); László Sándor (Institute for Fiscal Studies)
    Abstract: We study the taxation of the minimum wage in an environment with imperfect enforcement and informality. We leverage an increase in the audit threat for earnings below a reporting threshold at twice the minimum wage in Hungary and estimate reporting and employment responses with administrative panel data. Using bunching estimators and difference-in-differences methods, we show that a substantial share of those who report earning the minimum wage earn at least the same amount off the books. When enforcement is imperfect, a taxed minimum wage serves as a backstop on underreporting and recovers some revenue but also increases informality.
    Date: 2021–11–15
  9. By: Kaisa Kotakorpi; Satu Metsälampi; Topi Miettinen; Tuomas Nurminen
    Abstract: We investigate effects of tax reporting mechanisms on evasion and incidence in experimental double auction markets where counterfactual reporting and market outcomes can be studied after convergence. There are two control conditions: (i) markets without taxes and (ii) markets where taxes are automatically levied. These are compared to (iii) markets with seller-reporting only and fines paid if low-probability audit discovers evasion, to (iv) markets with both seller- and buyer-reporting and a higher audit probability due to any gap in the numbers reported by the seller and her customers, and to (v) markets where, in addition, buyer-reporting is costly. The latter two mimic varying reporting incentives in the so called third-party reporting in tax enforcement. We find that 20% of the sellers are truthful when only sellers report, but that 80% and 66% of them are truthful under costless and costly third-party reporting, respectively. Pricing, incidence, and reporting patterns in all treatments can be explained by a model of lying costs with image concerns based on Gneezy et al. (2018).
    JEL: H21 H22 H26 D40 D44 D91
    Date: 2021–06
  10. By: Israel Marques II (National Research University Higher School of Economics)
    Abstract: Who supports social policy in settings where institutions are weak? Existing work on social policy preferences focuses on the developed world, where governments can credibly commit to policy, tax evasion is constrained, and governments are accountable. In this paper, I relax these assumptions. I argue that weak accountability under poor institutions allow government officials to expend less effort to collect social policy contributions, decreasing expected revenues.For most, this is akin to a dead-weight cost that saps support for redistribution. For those with a comparative advantage in tax evasion, however, this allows for free-riding on the contributions of others and decreases the costs of social policy. As institutional quality declines and tax evasion becomes easier, individuals with a comparative advantage in tax evasion should therefore be more likely to support redistribution. I test this argument using public opinion data from a survey of 28,000 individuals in 28 post-communist countries.
    Keywords: Shadow Economy, Preferences for Redistribution, Public Opinion, Tax Evasion, Comparative Political Economy
    JEL: O15 H53
    Date: 2022
  11. By: Balde, Racky (UNU-MERIT, Maastricht University)
    Abstract: Lack of fiscal space in sub-Saharan Africa is a major preoccupation, particularly in the context of shocks. The majority of firms in the region are primarily in the informal sector and consequently do not pay taxes. This paper explores the effect of financial development on small firms’ compliance with value-added tax, profit tax and local tax. It equally explores the mitigating impact of informal finance on financial development’s role in driving small firms’ tax compliance. To demonstrate this, we estimate a recursive trivariate probit model. The results show that financial development increases the likelihood of firms being tax compliant. In contrast, access to informal finance decreases that likelihood. It also emerges that the lower the taxes, the greater the effects of low costs of banks on tax compliance. Another finding is that informal finance mitigates the effect of financial development on small firms’ tax compliance.
    Keywords: taxation, Africa, financial development, informal finance, informal economy
    JEL: D22 E26 H26
    Date: 2021–11–01
  12. By: Konstantins Benkovskis (Latvijas Banka, Stockholm School of Economics in Riga); Ludmila Fadejeva (Latvijas Banka)
    Abstract: We develop a novel way to evaluate the size of unreported wage payments at employee level. It is only the reported employer-employee income data combined with firm-level financial statements and survey information on various person-level indicators that are required for this purpose. We estimate the Mincer earning regression by the Stochastic Frontier Analysis approach, proxying the unreported wage payments by the non-negative inefficiency term. Our methodology is tested on the Latvian data: we find that small and young firms engage in illegal wage payments more than other firms. Unofficial payments to employees with small reported wages are more frequent and sizeable, revealing lower wage income inequality in Latvia when the unreported wage is taken into account.
    Keywords: unreported wage, tax evasion, Mincer earning regression, income distribution
    JEL: E26 H26 J08 J31
    Date: 2022–02–09
  13. By: Chan Mono Oum (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: The new economics of labour migration (NELM) suggests that migration substitutes for inaccessible credit markets. However, in a paradigm shift towards profit orientation, microfinance organizations in developing countries offer greater access to credit to potential migrants. That casts doubt on the prior understanding of the link between access to microcredit and migration. Exploiting survey data from 422 households in the northern part of Cambodia, this study examines the relationship between microcredit borrowing and migration decisions through the NELM theory in the South-South Migration (SSM) perspective. We employ the Endogenous Switching Probit model (ESP) to control for selection bias in borrowing decisions and the structural differences between borrowing and non-borrowing decisions that influence migration decisions. After instrumenting, the findings suggest that households with access to credit are more likely to have migrated family members than their non-borrowing counterparts, refuting the notion of migration as a substitute for credit. Household with borrowings from financial institution increase the likelihood of migrating by 5.6 percent while households with informal borrowing have a propensity to migrate about 3.2 percent. Our results have a number of policy implications, including guiding policymakers in rethinking the role of microcredit provision and redesigning microfinance programmes to maximise the return on labour migration.
    Keywords: formal credit; informal credit; microcredit; migration decisions; Cambodia
    JEL: F22 G51 R23
    Date: 2022–01–11
  14. By: Nomaler, Önder (UNU-MERIT, Maastricht University); Spinola, Danilo (UNU-MERIT, Maastricht University, Birmingham City University, and University of Johannesburg); Verspagen, Bart (UNU-MERIT, Maastricht University)
    Abstract: This article models the process of structural transformation and catching-up in a demand-led Southern economy constrained by its balance of payments. Starting from the Sraffian Supermultiplier Model, we model a dual-sector small open economy divided between traditional and modern sectors that interacts with a technologically advanced Northern economy. We propose two (alternative) autonomous elements that define the growth rate of this demand-led economy: government spending and exports. Autonomous government spending plays a central role in stimulating demand, and thus is a source of growth of the modern sector. Productivity adjusts to the growth rate of output, given by the growth rate of autonomous expenditure. Drawing from the Structuralist literature, the technologically laggard Southern economy catches up by absorbing technology from the Northern economy, potentially closing the technology gap. The gap affects the income elasticity of exports, bringing a supply-side mediation to the growth rates in line with the Balance of Payments Constrained Model. We observe that a demand-led government policy plays a central role in structural change, pushing the modern sector to a take-off. Also, the economy is stable in terms of capacity utilisation and modern sector employment.
    Keywords: Industrialisation, Catching-up, Balance of Payments, Sraffian Supermultiplier
    JEL: O41 E12 E61
    Date: 2021–10–18

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