nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒08‒08
four papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Minimum Wages in Developing Countries By Fang, Tony; Ha, Viet Hoang
  2. Informal versus Formal: Microfirms' Productivity Gaps By Gutiérrez, L. H.; Rodríguez- Lesmes, P.
  3. The Labor Market Impacts of Venezuelan Refugees and Migrants in Brazil By Shamsuddin, Mrittika; Acosta, Pablo A.; Schwengber, Rovane Battaglin; Fix, Jedediah; Pirani, Nikolas
  4. On the Optimal Size of a Joint Savings Association By Stark, Oded; Budzinski, Wiktor; Jakubek, Marcin; Kosiorowski, Grzegorz

  1. By: Fang, Tony (Memorial University of Newfoundland); Ha, Viet Hoang (Memorial University of Newfoundland)
    Abstract: There is considerable debate on the level and effects of minimum wages for many decades. However, most of the studies are conducted in developed countries. This chapter first reviews the theoretical frameworks of anticipated effects of a minimum wage increase on wages and employment in developing countries. The empirical challenges are then discussed, including potential heterogeneity, simultaneity (or endogeneity) between employment and minimum wages, and possible omitted variable bias, taking into consideration of the different labour market structures and labour market institutions in developing countries, particularly the level of informal sector, extent of binding minimum wages, level of enforcement, and the vulnerability of the workers impacted. Evidence from BRICS members (Brazil, Russia, India, China, and South Africa) are reviewed and discussed. Surprisingly, there is substantial evidence of positive wage effects in both formal and informal sectors, although the adverse effects on employment are generally modest in the formal sector, and almost non-existent in the informal sector. However, when minimum wages are binding and enforced, studies focusing on vulnerable workers do find significant and positive wage effects and strong disemployment effects, implying that the classic trade-off of minimum wages between higher wages and lower employment does occur in developing countries.
    Keywords: minimum wages, labour market outcomes, developing countries
    JEL: J31 J33 J38
    Date: 2022–05
  2. By: Gutiérrez, L. H.; Rodríguez- Lesmes, P.
    Abstract: Although evidence of a productivity gap between formal and informal firms is observed, this 'formality premium' is less explored for microfirms. The informality of microfirms is a central concern in low- and middle-income countries, and a crucial demand is noted for designing policies addressing this issue because they are the bulk of the economic tissue. We fill this void by estimating a productivity premium for the case of Colombia, considering two margins of informality: extensive, referring to business registration, and the intensive, which includes as well labor regulations. We use a unique longitudinal dataset from the Microenterprise Survey by the Colombian Statistics Department, which follows approximately 39,000 micro-establishments with up to 9 employees during 2012–2016. We utilize the transition into and out of formality to estimate the productivity premium (yearly sales per worker) between informal and formal firms, thereby exploring differences concerning initial productivity. We use a fixed-effects quantile regression to explore differential effects along the productivity distribution. We find evidence of a premium for both the extensive (20%) and intensive margins (6%), a gap that is decreasing along with the firm's productivity. The evidence of these premiums is related to two growth strategies of firms: an increase in capital investments for the extensive margin and an increase in human capital quality for the intensive margin. Further, we find the premium is notoriously wider for young firms (less than three years in the business) with a steeper gradient. We do not find systematic differences across sectors, gender of the owners, and motivation. These results are new evidence that supports the existence of a premium and the transition into and out of formality of microfirms in middleincome countries. Moreover, they suggest that microfirms' formalization and growth policies should be oriented toward promoting and enhancing formality's benefits.
    Keywords: Microfirms, firm informality, productivity premium, Colombia
    Date: 2022–07–05
  3. By: Shamsuddin, Mrittika (Dalhousie University); Acosta, Pablo A. (World Bank); Schwengber, Rovane Battaglin (World Bank); Fix, Jedediah (UNHCR); Pirani, Nikolas (UNHCR)
    Abstract: As more and more Venezuelans leave their country, fleeing the economic and social crisis, the number of Venezuelans in Brazil has risen steadily since 2016, constituting about 18.6 percent of Brazil's 1.4 million refugee and migrant population as of October 2020. Past research finds that the impacts of forced displacement on the labor market outcomes of host community are mixed and tend to depend on country characteristics. This paper extends the previous literature by exploring the economic impact of Venezuelan influx on Roraima, the state bordering the República Bolivariana de Venezuela at the north and the main gateway of the Venezuelan refugees and migrants entering Brazil, and focusing on the formal sector employment of the host community. Using survey and administrative data and regression discontinuity frameworks, this paper finds that in the short-run, the Venezuelan influx led to an overall increase in unemployment and a decrease in informal sector employment, specially among the female workers in Roraima. Focusing on the host community, the findings suggest that Venezuelan influx led to increase in formal sector employment among the Brazilians, while the effect on both overall and native wages are heterogenous, suggesting distribution impacts and need for gender targeted policies.
    Keywords: labor market impacts, Venezuelan refugees and migrants, host community, forced displacement
    JEL: J21 J31 J61 F22 F15 O15 R23 H20 H50
    Date: 2022–06
  4. By: Stark, Oded (University of Bonn); Budzinski, Wiktor (University of Warsaw); Jakubek, Marcin (Institute of Economics, Polish Academy of Sciences); Kosiorowski, Grzegorz (Cracow University of Economics)
    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: joint savings associations, A Rotating Savings and Credit Association (ROSCA), minimal expected waiting time, optimal size of a ROSCA, limited size of a ROSCA
    JEL: D01 D02 D16 D23 D71 D86 G23 O12 O17 P13
    Date: 2022–06

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