nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒06‒20
twelve papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Beliefs and selection in formal and informal labor markets: an experiment By Esteban, Steffanny Romero; Mantilla, Cesar
  2. COVID-19 and informal work: Degrees and pathways of impact in 11 cities around the world By Martha Alter Chen; Erofili Grapsa; Ghida Ismail; Sarah Orleans Reed; Michael Rogan; Marcela Valdivia
  3. Tax Obsessions: Taxpayer Registration and the Informal Sector in sub-Saharan Africa By Moore, Mick
  4. Heterogeneous Returns of Informality: Evidence From Brazil By Andrea Otero-Cortés
  5. Filling in the gaps: Expanding social protection in Colombia By Paula Garda; Jens Matthias Arnold
  6. Immigration, labor markets and discrimination: Evidence from the venezuelan exodus in Perú By Andre Groeger; Gianmarco León-Ciliotta; Steven Stillman
  7. Income Tax Evasion Estimation in Hungary By Palma Filep-Mosberger; Adam Reiff
  8. Small Nets for Big Fish? Tax Enforcement on the Richest – Evidence from Uganda By Santoro, Fabrizio; Waiswa, Ronald
  9. Does climate change concern alter tax morale preferences? Evidence from an Italian survey By Cascavilla, Alessandro
  10. Withholding Matters: The Impact of Act 32 on Compliance with the Earned Income Tax By Sutirtha Bagchi
  11. Expanding access to finance to boost growth and reduce inequalities in Mexico By Alessandro Maravalle; Alberto González Pandiella
  12. On the optimal size of a joint savings association By Stark, Oded; Budzinski, Wiktor; Jakubek, Marcin; Kosiorowski, Grzegorz

  1. By: Esteban, Steffanny Romero; Mantilla, Cesar
    Abstract: We create a dual labor market in the laboratory with participants selecting where to perform a real effort task: one with higher piece-rate and taxed labor income, resembling a formal market; or another without tax contributions, resembling an informal one. Although the tax revenue is divided among all participants, regardless of their chosen market, our parameterization yields two coordination equilibria. We thus explore whether feedback regarding labor market composition (i.e., how many group-mates chose each market) and relative earnings in each market increase the selection of the formal labor market. This feedback increases the choice of the formal labor market by six percentage points (from 64% to 70%) and increases the accuracy of beliefs regarding labor market composition. Informing the average earnings in both markets seems to work as a focal point that increases participation in the formal market.
    Date: 2022–05–04
  2. By: Martha Alter Chen; Erofili Grapsa; Ghida Ismail; Sarah Orleans Reed; Michael Rogan; Marcela Valdivia
    Abstract: This paper presents findings from two rounds (2020 and 2021) of a study on the impact of the COVID-19 crisis on informal workers in 11 cities across five regions of the world (Africa, Asia, Eastern Europe, Latin America, and North America). The study, carried out by the WIEGO network in partnership with local organizations of informal workers in each city, included a survey questionnaire and key informant interviews, both conducted by phone. The study findings confirm that the pandemic recession severely undermined the livelihoods of informal workers with limited recovery by mid-2021.
    Keywords: Informal economy, Economic impact, COVID-19, Recession, Work status, Earnings, Food security, Coping strategies
    Date: 2022
  3. By: Moore, Mick
    Abstract: Motivation: There are three puzzling features of sub-Saharan African tax systems: tax administrations maintain records on vast numbers of small enterprises that actually provide no revenue; they continually invest resources into registering even more of these “unproductive taxpayers†; and discussions about taxing small enterprises are framed by the ambiguous, misleading concept of the “informal sector†. Purpose: To make sense of these separate, puzzling practices and narratives by exploring the synergies between them, and the broader organisational and political interests that they serve. Methods and approach: There is little statistical or sociological information on the functioning of national tax administrations in sub-Saharan Africa. The analysis is based on the results of recent research; a thorough search for useful data; my own extensive interactions with African tax administrators and relevant international organizations; and a sensitivity to the political dimensions of taxation. Findings: The three features of tax systems that are individually puzzling make sense when examined holistically. The continual drive to register more taxpayers provides an unduly favourable impression of the extent of policy and managerial efforts to collect more revenue. The informal sector narrative locates the apparent cause of revenue scarcity in the alleged under-taxation of small enterprises and poorer people, and thus helps divert attention from failures adequately to tax more privileged Africans and larger enterprises. Policy implications: Be very wary of claims that it would be a good idea to invest resources in registering large numbers of new taxpayers in sub-Saharan Africa. Try to avoid using the term “informal sector†when discussing issues of tax policy and administration—it is confusing and diversionary.
    Keywords: Finance,
    Date: 2022
  4. By: Andrea Otero-Cortés
    Abstract: This paper estimates the marginal treatment effect of informality on wages for Brazil at the individual level using regional data on labor inspectors for identification. The results show that there is significant essential heterogeneity among otherwise identical workers that lead them to self-select into the type of jobs, formal or informal, that better reward their skills. The Average Treatment Effect (ATE) is 22%, but not statistically different from zero. But there are individuals with very low non-observed costs of formality that in fact earn premiums of up to 100% of their wage rate from being formal and workers who would be hurt from switching to formality as they experience very high non-observed costs of being formal. Two policy experiments in which we tighten enforcement of the labor law via hiring more labor inspectors increases the likelihood of workers being formal, but it has, on average, a negative effect on wages for the workers who are induced to switch from informality to formality. **** RESUMEN: Este documento estima para Brasil el efecto marginal de la formalidad laboral en los salarios a nivel individual utilizando una combinación de datos regionales sobre inspecciones laborales y actividad económica. Los resultados muestran que existe una heterogeneidad esencial significativa entre trabajadores que son idénticos en sus características observadas, que los lleva a auto-seleccionarse en el tipo de trabajos, formales o informales, que recompensan mejor sus habilidades. El efecto promedio del tratamiento (ATE) es del 22%, pero no es estadísticamente diferente de cero. Sin embargo, hay individuos con costos de formalidad no observados muy bajos que de hecho ganan primas de hasta el 100% de su salario por ser formales y trabajadores que se verían perjudicados por cambiar a la formalidad ya que experimentan costos no observados muy altos de ser formales. Dos experimentos de políticas en los que imponemos una aplicación más estricta de la ley laboral mediante la contratación de más inspectores laborales aumenta la probabilidad de que los trabajadores sean formales, pero tiene, en promedio, un efecto negativo en los salarios de los trabajadores que son inducidos a pasar de la informalidad a la formalidad.
    Keywords: Labor informality, labor regulation, enforcement, marginal treatment effects, Informalidad laboral, regulación laboral, aplicación, efectos marginales de tratamiento
    JEL: H26 J24 J32 J46 K31
    Date: 2022–06–10
  5. By: Paula Garda; Jens Matthias Arnold
    Abstract: The pandemic has highlighted significant gaps in social protection, in particularamong informal workers. With around 60% of workers in informal jobs, many of those most in need of social protection are left behind. The government has attempted to fill this gap with non-contributory benefits, but coverage and benefit levels are low. Better-off formal workers have access to a full range of social protection benefits, involving large-scale public subsidies that widen the gap. Labour informality and social protection coverage are interlinked, as high social contributions are one of the main barriers to formal job creation. Ensuring some universal basic social protection, while simultaneously lowering the cost of formal employment, would reduce labour informality, poverty and inequality and raise productivity, all of which are long-standing challenges in Colombia.
    Keywords: Colombia, employment, health, informality, pensions, public policy, social protection
    JEL: H51 H53 H55 I14 J32 J43 J65
    Date: 2022–05–19
  6. By: Andre Groeger; Gianmarco León-Ciliotta; Steven Stillman
    Abstract: Venezuela is currently experiencing the biggest crisis in its recent history. This has led more than 5.6 million Venezuelans to emigrate, one million of those to Peru, which amounted to an increase of over 2 percent in the Peruvian population. Venezuelan immigrants in Peru are relatively similar in cultural terms, but, on average, more skilled than Peruvians. In this paper, we first examine Venezuelans'perceptions about being discriminated against in Peru. Using an instrumental variable strategy, we document a causal relationship between the level of employment in the informal sector - where most immigrants are employed - and reports of discrimination. We then study the impact of Venezuelan migration on local's labor market outcomes, reported crime rates and attitudes using a variety of data sources. We find that inflows of Venezuelans to particular locations led to increased employment and income among locals, decreased reported crime, and improved reported community quality. We conduct a heterogeneity analysis to identify the mechanisms behind these labor market effects and discuss the implications for Peruvian immigration policy.
    Keywords: immigration, forced migration, discrimination, labor markets, Peru, Venezuela
    JEL: F22 J15 O15 R23
    Date: 2022–05
  7. By: Palma Filep-Mosberger (Magyar Nemzeti Bank (Central Bank of Hungary)); Adam Reiff (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: This paper studies labour market tax avoidance in the 2010s in Hungary, following major labour market tax reforms in the beginning of the decade. First we show that aggregate time series are broadly consistent with a †whitening†process, in which a higher fraction of incomes are declared. However, as aggregate developments are driven by several, often unobservable factors, we cannot conclude that the observed phenomena are indeed caused by a whitening process in the labor market. Therefore in the second part of the paper we use several micro datasets to shed light on the nature of the whitening process. By comparing the consumption pattern of entrepreneurs (who might have undeclared incomes) and state sector employees (who are unlikely to have undeclared income), we show that income underreporting of entrepreneurs did decline in the 2010s. On the other hand, we find that the number of illegal employees – e.g. of those who work without any work contract – only temporarily declined in the aftermath of the financial crisis and seems to follow a procyclical pattern.
    Keywords: labour market tax avoidance, illegal employment, income underreporting.
    JEL: H26 J21 J31
    Date: 2022
  8. By: Santoro, Fabrizio; Waiswa, Ronald
    Abstract: Appropriately taxing the richest is a priority for every government, even more so in Africa, where higher revenue mobilisation is needed to fund growth. In Uganda, the revenue authority launched a specific unit to monitor the tax affairs of the richest individuals. Thanks to a close collaboration with the Uganda Revenue Authority (URA), we evaluate the impact of such policy on a range of tax filing and payment outcomes of targeted taxpayers, as gathered from a wealth of administrative data. We show that the policy only has been partially successful. While it increased the probability of filing, especially by politically relevant taxpayers, it produced a seemingly small response in which treated taxpayers would declare less on different margins, with the end result of not declaring more tax liabilities. On the tax payment side, only a small yet significant impact on tax collected is measured. In parallel, we show a strong compensating response across tax heads. Importantly, we also measure the spillover effect on companies associated with the richest taxpayers, again documenting complex compensating reactions. We inform future policymaking decisions, suggesting a higher simultaneous focus on different tax heads and a more holistic approach to monitoring both individual and corporate tax accounts.
    Keywords: Governance,
    Date: 2022
  9. By: Cascavilla, Alessandro
    Abstract: Given the increasing relevance of sustainability debates, this paper investigates the relationship between the climate change concern and the willingness to pay an environmental tax, considering the interplay with the general level of individual tax morale. By employing a survey among Italian economics students, we show that the climate change concern affects the attitude towards paying an environmental tax both directly and indirectly, via a change in the preferences between the general and the specific tax morale. We find that also tax immoral subjects are significantly willing to pay an environmental tax as their awareness of climate change increases. Given the goal to increase the public acceptance of an environmental tax, we provide three main policy implications: i) carry on campaigns to increase the general level of tax morale, following the guidelines given by the OECD (2019); ii) raise the climate change awareness among people, for instance through investments in sensibilization campaigns on environmental-related topics; iii) increase awareness about climate change in particular among individuals who show lower attitude towards paying taxes. The evidence about an inconsistent tax preference made us recommend a policy addressed to a specific target group rather than to individuals and based on non-monetary incentives, such as nudging and moral suasion tools.
    Keywords: Energy survey; Carbon tax; Climate change; Tax evasion and avoidance; Environmental Taxes and Subsidies
    JEL: H23 Q40 Q50
    Date: 2022–05
  10. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: This paper examines Act 32 of the Pennsylvania state legislature which mandated the introduction of withholding for the local earned income tax (EIT) for all employees and the consolidation of a fragmented collection system to one collector per county effective January 1, 2012. The estimates I obtain suggest that the act resulted in increased compliance with the EIT of about 13 percent. A falsification exercise examining compliance with the property tax for the identical municipalities confirms that Act 32 did not impact the property tax. Both findings are robust to the inclusion of municipality fixed effects or municipality-specific time trends.
    Keywords: Earned income tax; Tax compliance; Withholding; Event Study
    JEL: H26 H71 R51
    Date: 2022–05
  11. By: Alessandro Maravalle; Alberto González Pandiella
    Abstract: The access to formal financial services in Mexico is particularly low. Access is also significantly unequal across income levels, gender, between rural and urban areas and across regions. SMEs access to bank credit is low, hampering firms’ ability to grow and innovate. The use of cash and informal credit is still widespread, especially in rural areas, where financial infrastructure is underdeveloped. The diffusion of digital financial services is slowly advancing but remains low, hindered by a relatively low level of financial literacy and a digital divide. Expanding access to finance would enable Mexican households to invest in education and health, and better manage income shocks and smooth consumption. It would also enable Mexican firms to invest more, increase productivity and create formal jobs. Low-income households, small firms and more disadvantaged regions would particularly benefit, as it would unlock new economic opportunities for them. Boosting competition in the banking sector would facilitate SMEs access to credit by lowering interest rate margins. Upgrading the regulatory framework of the financial system would help increase competition and quality of financial services. The potential of the fintech sector is yet to be materialised, which would further increase competition and bring financial services to wider segments of the population. Strengthening financial education and digital literacy would facilitate a larger and better use of traditional and digital financial services.
    Keywords: competition, credit, digital, financial education, financial inclusion, FinTech, SMEs
    JEL: D18 G2 G41 G51 G52 G53 O32
    Date: 2022–06–03
  12. By: Stark, Oded; Budzinski, Wiktor; Jakubek, Marcin; Kosiorowski, Grzegorz
    Abstract: We develop a formula for the optimal size of a joint savings association between individuals who share the same financial goal and who can save towards that goal at the same rate. Our motivating example and the core of our analysis is a Rotating Savings and Credit Association (ROSCA). We measure the efficiency of a ROSCA by the expected waiting time that it takes a participant to attain his goal when no participant reneges on his commitment to contribute to the common fund, and when each of the participants receives (once) the funds needed to meet his goal. Given this criterion, we define the optimal size of a ROSCA as the number of participants that results in the minimal expected waiting time. We show that an optimal size of a ROSCA exists, that it is limited, and that it is a multiple of the number of time periods that it takes an individual to save on his own. Somewhat surprisingly, we find that when treated as a function of the size of a ROSCA, the expected waiting time is not monotonic when the size builds up from an individual saving on his own to the optimal size. A similar result obtains when we study cases where a ROSCA is enlarged beyond the optimal size. Our findings help explain the limited size as well as other features of ROSCAs observed in developing countries all over the world.
    Keywords: Financial Economics, Public Economics
    Date: 2022–05–24

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