nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2022‒11‒14
nine papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. Does Competition from Informal Firms Hurt Job Creation by Formal Firms ? Evidence Using Firm-Level Survey Data By Amin,Mohammad
  2. Education, Informality and the Pandemic: Explaining the Unequal Impacts of Covid-19 in the Mexican Labour Market By Garcia, Aida; Martin, Chris; Okolo, Magdalyn
  3. Workers at Risk : Panel Data Evidence on the COVID-19 Labor Market Crisis in India By Bussolo,Maurizio; Kotia,Ananya; Sharma,Siddharth
  4. The Unintended Consequences of Deportations : Evidence from Firm Behavior in El Salvador By Bandiera,Antonella Agostina; Dinarte Diaz,Lelys Ileana; Rozo Villarraga,Sandra Viviana; Schmidt-Padilla,Carlos; Sviatschi,Maria Micaela; Winkler,Hernan Jorge
  5. Digital Technology Uses among Informal Micro-Sized Firms : Productivity and Jobs Outcomes in Senegal By Atiyas,Ä°zak; Dutz,Mark Andrew
  6. Cheating Responses to Tax Evasion By Martinangeli, Andrea; Windsteiger, Lisa
  7. Trickle Down Tax Morale : A Cross Country Survey Experiment By Mellon,Jonathan; Peixoto,Tiago Carneiro; Sjoberg,Fredrik Matias; Gauri,Varun
  8. Improving Tax Compliance without Increasing Revenue : Evidence from Population-Wide Randomized Controlled Trials in Papua New Guinea By Hoy,Christopher Alexander; McKenzie,Luke; Sinning,Mathias Georg
  9. Will We Ever Be Able to Track Offshore Wealth? Evidence from the Offshore Real Estate Market in the UK By Jeanne Bomare; Ségal Le Guern Herry

  1. By: Amin,Mohammad
    Abstract: The informal sector is an important source of livelihoods and jobs for a vast majority of people in developing countries. However, there is concern that the informal sector may undermine job creation in the formal sector. According to the “parasite†view of informality, informal firms can compete against formal firms, and often "unfairly" so as they do not have to comply with costly regulations and pay taxes. This "unfair" advantage makes it difficult for formal firms to compete against informal firms, implying a significant loss of formal sector jobs. Using firm-level survey data for manufacturing small and medium-size enterprises in 109 mostly developing countries, this study estimates the impact of competition from informal firms on the growth rate of employment among formal sector small and medium-size enterprises. The results show that the growth rate of employment declines significantly as competition from informal firms rises. According to the baseline specification, for each one standard deviation increase in informal competition, the employment growth rate declines by 1 percentage point. Consistent with the parasite view of informality, the negative impact on job growth is much larger when the business environment is less conducive to operating formally versus informally due to factors such high corruption, weak rule of law, more burdensome regulations, and high profit tax rate. Several checks are provided against endogeneity concerns.
    Keywords: Labor Markets,Business Environment,Financial Sector Policy,Judicial System Reform,Access to Finance
    Date: 2021–01–19
  2. By: Garcia, Aida; Martin, Chris; Okolo, Magdalyn
    Abstract: The impact of the Covid-19 in Mexico was especially severe for non-graduates and for workers in informal employment. We argue that this occurred despite the adverse shocks from the pandemic being similar for all workers, because non-graduates and informal workers are in a weaker position in the labour market. We support this argument by presenting novel evidence of shorter job tenures and higher rates of transition from employment to non-employment for these workers and by showing that simulation of a DSGE model with the same shocks for all workers matches the experience of Mexico during the pandemic well. To do this, we develop an innovative model that differentiates between graduates and non-graduates as well as between formal and informal workers; the key feature of our model is that the job surplus for non-graduates and informal workers is smaller, making these workers more vulnerable to adverse shocks. Our results are likely to be applicable to other emerging economies with large numbers of informal workers.
    Keywords: Covid-19; Mexico; Search Frictions; DSGE model
    JEL: E24 E26 J46
    Date: 2022
  3. By: Bussolo,Maurizio; Kotia,Ananya; Sharma,Siddharth
    Abstract: The COVID-19 pandemic is having unequal impacts. Research has highlighted that across race, gender, age, and income groups, the health and economic consequences of this crisis are far from uniform and other preexisting inequalities have been exacerbated. This paper focusses on the differential impact on the formal and informal segments of the labor market in India, using data from a large household panel survey and employing a difference-in-differences event study approach. Within the same industry and district, initially informal wage workers were significantly more vulnerable to the loss of employment than initially formal workers during the early phase of COVID-19 (April 2020). Furthermore, income declined significantly more for households whose head worked as an informal wage worker than for households with a formally employed head. However, the post-COVID employment and income differentials between informal and formal workers narrowed after April 2020. By July 2020, the decline in income (from the pre-COVID baseline of February 2020) was not significantly different across households with informally and formally employed heads, suggesting that while informal workers were affected more severely by the early COVID-19 shock, they also recovered faster from it.
    Keywords: Rural Labor Markets,Employment and Unemployment,Labor Markets
    Date: 2021–03–16
  4. By: Bandiera,Antonella Agostina; Dinarte Diaz,Lelys Ileana; Rozo Villarraga,Sandra Viviana; Schmidt-Padilla,Carlos; Sviatschi,Maria Micaela; Winkler,Hernan Jorge
    Abstract: Can repatriation inflows impact firm behavior in origin countries? This paper examines this question in the context of repatriation inflows from the United States and Mexico to El Salvador. The paper combines a rich longitudinal data set covering all formal firms in El Salvador with individual-level data on all registered repatriations from 2010 to 2017. The empirical strategy combines variation in the municipality of birth of individuals repatriated over 1995-2002—before a significant change in deportation policies—with annual variation in aggregate inflows of repatriations to El Salvador. The findings show that repatriations have large negative effects on the average wages of formal workers. This is mainly driven by formal firms in sectors that face more intense competition from the informal sector, which deportees are more likely to join. Repatriation inflows also reduce total employment among formal firms in those sectors. Given that most deportees spend less than a month abroad, these findings suggest that the experience of being detained and deported can have strong negative effects not only on the deportees, but also on their receiving communities.
    Keywords: Labor Markets,Educational Sciences,Rural Labor Markets,Crime and Society,Human Migrations&Resettlements,Migration and Development,International Migration
    Date: 2021–01–21
  5. By: Atiyas,Ä°zak; Dutz,Mark Andrew
    Abstract: This paper explores the use of digital technologies among informal micro-sized firms in Senegal, their association with productivity, sales, exports and jobs, and the role of age and gender dimensions of enterprise owners. The study uses a new national sample of over 500 firms, of which over 90 percent are not fully formal and over 95 percent are micro-sized, employing five or fewer full-time employees. The analysis finds that using a 2G mobile phone is significantly positively correlated both with productivity and sales, and using a smartphone is associated with an additional premium relative to using a 2G. The largest statistically significant conditional correlate of productivity, sales and jobs is a more specialized internal-to-the-firm management technology proxying for management capabilities more generally, namely inventory control/point of sales (POS) software. Use of digital technologies to facilitate external-to-the-firm transactions, namely using mobile money to pay suppliers and to receive payments from customers are also statistically significant conditional correlates of productivity and sales. Using a smartphone is also positively correlated with exporting (while using only a 2G phone is not). Finally, there are significant digital divides in the use of digital technologies across age and gender groupings.
    Keywords: Labor Markets,Food&Beverage Industry,Textiles, Apparel&Leather Industry,Pulp&Paper Industry,Common Carriers Industry,Construction Industry,Business Cycles and Stabilization Policies,General Manufacturing,Plastics&Rubber Industry,Food Security,Gender and Development,Energy Policies&Economics
    Date: 2021–03–09
  6. By: Martinangeli, Andrea; Windsteiger, Lisa
    JEL: D01 D31 D63 H23 H26
    Date: 2022
  7. By: Mellon,Jonathan; Peixoto,Tiago Carneiro; Sjoberg,Fredrik Matias; Gauri,Varun
    Abstract: Studies have encouraged pro-social behavior by experimentally manipulating people's views of what others like them tend to do (descriptive norms). These studies positively change behaviors, including charitable giving, littering, organ donation, and tax compliance. This paper argues that these results may be explained by a tendency to reciprocate positive actions and avoid being taken advantage of. The descriptive norm account predicts that positively describing the behavior of ordinary people will be most effective at increasing citizens’ willingness to pay taxes, and messages describing the behavior of other groups should be less effective. However, reciprocity theory suggests that highlighting pro-social behavior by groups believed not to contribute their fair share, such as rich people, should be effective because it will reduce the subject's perception that they are being taken advantage of when they pay taxes. These theories are tested in an online experiment in Kenya, Australia, the United States, the Philippines, and South Africa. The findings show that the descriptive norms treatment is ineffective, while the rich people treatment significantly increases tax morale, supporting reciprocity theory. The findings suggest that tax agencies may increase tax compliance by visibly tackling tax avoidance among groups believed to avoid taxes, such as rich citizens.
    Keywords: Public Finance Decentralization and Poverty Reduction,Public Sector Economics,Tax Administration,Tax Law,Employment and Unemployment,Gender and Development
    Date: 2021–01–13
  8. By: Hoy,Christopher Alexander; McKenzie,Luke; Sinning,Mathias Georg
    Abstract: This paper studies the impact of “nudges†on taxpayers with varying tax compliance histories in Papua New Guinea. It presents the results from two population-wide randomized controlled trials in a setting that is characterized by low compliance rates and a lack of effective enforcement. The study tests the impact of text messages, flyers, and emails that remind taxpayers of declaration due dates and provide information about the public benefits of paying tax. The findings show that the treatments increased the number of tax declarations filed without increasing the amount of tax paid because the taxpayers who responded to the nudges were largely exempt from paying tax. This result is consistent across tax types, communication channels, and time periods. The findings also show that the treatments had no impact on previously non-filing taxpayers. Collectively, the results illustrate that taxpayers who face the lowest cost from complying are the most likely to respond to a nudge.
    Keywords: Tax Administration,Tax Law,Public Sector Economics,Public Finance Decentralization and Poverty Reduction,Mining&Extractive Industry (Non-Energy),Inequality,Educational Sciences,International Trade and Trade Rules
    Date: 2021–02–08
  9. By: Jeanne Bomare (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Ségal Le Guern Herry (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides evidence of the growing importance of real estate assets in offshore portfolios. We study the implementation of the first multilateral automatic exchange of information norm, the Common Reporting Standard (CRS), which introduces cross-border reporting requirements for financial assets but not for real estate assets. Exploiting administrative data on property purchases made by foreign companies in the UK, we show that the implementation of the CRS led to a significant increase of real estate investments from companies incorporated in the tax havens that were the most exposed to the policy. We confirm that this increase comes from company owners of countries committing to the new standard by identifying the residence country of a sub-sample of buyers using the Panama Papers and other leaked datasets. We estimate that between £16 and £19 billion have been invested in the UK real estate market between 2013 and 2016 in reaction to the CRS, suggesting that at the global scale between 24% and 27% of the money that fled tax havens following this policy were ultimately invested in properties.
    Date: 2022–06–05

This nep-iue issue is ©2022 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.