nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2023‒07‒17
twelve papers chosen by
Catalina Granda Carvajal
Universidad de Antioquia

  1. The Impact of Inequality on the Informal Economy in Latin America and the Caribbean with a MIMIC Model By Marcos Takanohashi; Marcel Ribeiro; Friedrich Schneider
  2. Informal employment from migration shocks By Marica Valente; Timm Gries; Lorenzo Trapani
  3. Development Delays, Illegal Immigration and the Informal Sector in French Guiana By Moustapha Aladji; Mickael Cita; Gaelle Lebeau
  4. Shadow Economy in Sri Lanka: A Review and New Estimates By K K C Sineth Kannangara; Yanrui Wu
  5. Tax Policy Design in a Hierarchical Model with Occupational Decisions By Sebastian Castillo
  6. Tax Design, Information, and Elasticities: Evidence From the French Wealth Tax By Bertrand Garbinti; Jonathan Goupille-Lebret; Mathilde Muñoz; Stefanie Stantcheva; Gabriel Zucman
  7. Expenditure Responses to Adverse Health Shocks: Evidence from a Panel of Colombian Households By Cortes, D; Gallegos-Vargas, A; Perez, J
  8. Well-being effects of the digital platform economy. The case of temporary and self- employment By Maite Blázquez; Ainhoa Herrarte; Ana I. Moro Egido
  9. Unregistered Firms, Financial Access and Innovation By Sam Z. Njinyah; Simplice A. Asongu
  10. Financial Inclusion and Women Economic Empowerment in Ghana By Zelu, Barbara Ama; Iranzo, Susana; Pérez Laborda, Alejandro
  11. "Unearthing the Impacts: Illegal Mining's Toll on Formal Employment and Job Creation" By Yeboah, Samuel
  12. Análisis y recomendaciones sobre las reformas laboral y pensional By Luis Fernando Mejía

  1. By: Marcos Takanohashi; Marcel Ribeiro; Friedrich Schneider
    Abstract: Vast literature is available covering main Informal Economy (IE) causes and consequences for Latin America and Caribbean (LAC), but its size estimation has been mainly limited to worldwide models applied to the region. This paper proposes a MIMIC Base Model using a data set composed by 41 countries in LAC, in which both inequality and total factor productivity are introduced on top of traditional variables. Modelling results on IE estimates for LAC countries that are at par with the literature. When compared with a model using data from 188 countries, inequality has an impact ten-fold higher in the level of informality. Results suggest the importance of tailored data set selection when modelling IE with MIMIC.
    Keywords: Informal Economy (IE). MIMIC (Multiple Indicators Multiple Causes), shadow economy, underground economy, non-observed economy, inequality, informality, tax burden, quality of state institutions, regulations, governance, GINI coefficient, TFP, , Latin America and Caribbean (LAC)
    JEL: D78 E26 H26 H32 O17 O54
    Date: 2023
  2. By: Marica Valente; Timm Gries; Lorenzo Trapani
    Abstract: We propose a new approach to detect and quantify informal employment resulting from irregular migration shocks. Focusing on a largely informal sector, agriculture, and on the exogenous variation from the Arab Spring wave on southern Italian coasts, we use machine-learning techniques to document abnormal increases in reported (vs. predicted) labor productivity on vineyards hit by the shock. Misreporting is largely heterogeneous across farms depending e.g. on size and grape quality. The shock resulted in a 6% increase in informal employment, equivalent to one undeclared worker for every three farms on average and 23, 000 workers in total over 2011-2012. Misreporting causes significant increases in farm profits through lower labor costs, while having no impact on grape sales, prices, or wages of formal workers.
    Keywords: Informal employment, Migration shocks, Farm labor, Machine learning
    JEL: F22 J61 J43 J46 C53
    Date: 2023–09
  3. By: Moustapha Aladji (MINEA - UG - Université de Guyane); Mickael Cita (CREDDI - Centre de Recherche en Economie et en Droit du Développement Insulaire [UR7_2] - UA - Université des Antilles); Gaelle Lebeau
    Abstract: The arrival of a population on a territory brings a potential source of additional work that overall allows the host country to increase its growth as shown by Chojnicki and Ragot (2012) in their study. However, the France has the particularity of being present on different continents and thus holding territories with great disparity. Through this article, we want to focus on immigration in French Guiana, looking for explanatory factors for the reasons for immigration to this territory. At the same time, we are asked about the contributions of this immigration to know if it represents an asset or a constraint for the development of the territory. The answer is obviously not binary, which gives more interest and complexity to the question. Thus, we were able to carry out a first theoretical analysis in order to grasp the most relevant elements to be studied in order to set up the empirical analysis. Then, we chose a Probit model that we then confronted with the Hosmer-Lemeshow test. The theoretical analysis allowed us to highlight various elements of informal integration (housing, working conditions) that also promote a form of precariousness. Empirical analysis, she rather highlighted the correlated factors that support this immigration rate. Finally, we observed the case of the Hmong population settled in French Guiana for several decades, which represent a relatively successful example of immigration with a positive economic impact.
    Keywords: Development Informal work Precariousness Underground economy Unemployment Abbreviations: OFPRA: Office for the Protection of Refugees and Stateless Persons IM: Immigration ST: Status RE: Income AGE: Age
    Date: 2022–09–15
  4. By: K K C Sineth Kannangara (Business School, The University of Western Australia and Central Bank of Sri Lanka); Yanrui Wu (Business School, The University of Western Australia)
    Abstract: Using a country-specific data set to reflect employment in the official sector, the dynamic general equilibrium modelling results in this paper demonstrate that Sri Lanka's shadow economy has not behaved in line with the general literature finding of a shrinking shadow economy over time. Since 2012, especially, Sri Lanka has been experiencing a rapid surge in its shadow economy, which now accounts for about half of its publicly reported GDP. Therefore, this paper emphasises the significance of paying due attention to the performance of the economy and how to minimise the further worsening of the ability of the economy to receive expected outcomes of the policies implemented.
    Date: 2023
  5. By: Sebastian Castillo (University o fHelsinki, Helsinki GSE and the Finnish Centre of Excellence in Tax Systems Research)
    Abstract: This study incorporates occupational decisions in a hierarchical model to investigate distortions in the tax policy design. The economy has two sectors, wage-earners and self-employment, where evasion is only possible in the latter. The optimal audit split self-employed between audited and non-audited distorted the occupational decision in the last group. The marginal tax rate is smaller than the case without occupational choices, showing that not considering it produces an upward tax bias. The optimal IRS budget does not allow for auditing the entire self-employment sector but is larger than the case without occupational choices. Production efficiency is not attained at the optimum because occupational decisions are distorted. This result contradicts the Diamond-Mirrlees theorem. Finally, differential taxation is a Pareto improvement but implies higher taxes for self-employment. This result increases distortions in the optimal allocation of agents compared to the former setting.
    Keywords: Tax Evasion, Hierarchical Model, Tax Policy, Auditing, Income Taxation, Occupational Choice, Production efficiency
    JEL: H26 H21 H83
    Date: 2022–11
  6. By: Bertrand Garbinti; Jonathan Goupille-Lebret; Mathilde Muñoz; Stefanie Stantcheva; Gabriel Zucman
    Abstract: We study a French wealth tax reform that starkly reduced the information some taxpayers must report to the tax authority. Using a new dynamic bunching approach we estimate the average response to the reform, the share of compliers, and the local average treatment effect. The annual wealth growth rate of treated taxpayers falls by 0.5 percentage points after the reform. This decline is likely due to increased evasion, as suggested by the sharp responses in self-reported wealth but not in third-party-reported incomes. The wealth tax base becomes more elastic post reform, illustrating the key role of information policy choices for tax base elasticities.
    JEL: H26 H31
    Date: 2023–06
  7. By: Cortes, D; Gallegos-Vargas, A; Perez, J
    Abstract: We analyze the effect of adverse health shocks on households’ expenditure shares in different good categories using a fixed-effects approach and a structural approach based on microeconomic theory. We find that households substitute health and food expenditure in response to adverse health shocks. We find substantial heterogeneity in this trade-off between current and future health mediated by access to social protection, job contract type, and location (urban rural). Households from rural areas –where household heads are more likely to hold informal jobs and lack access to safety nets– are more vulnerable than others. Our findings suggest that access to formal employment and a higher quality of local institutions can help mitigate the negative consequences of health shocks.
    Keywords: health shocks, household expenditure, informal labor, urban-rural
    Date: 2023–06–15
  8. By: Maite Blázquez (Universidad Autonoma de Madrid.); Ainhoa Herrarte (Universidad Autonoma de Madrid.); Ana I. Moro Egido (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: The increase in atypical jobs (self-employment and temporary jobs) driven by the digital platform economy (gig economy) has put this type of work in the spotlight of the social and political debate. Among the countries of the European Union, Spain stands out for having the highest volume of digital platform work. This study uses microdata from the Spanish Living Conditions Survey for the year 2018 and Google trends data on Deliveroo, Airbnb, Just Eat, Uber, and Freelance as a proxy of digital platform economy demand to analyse the well-being effects of being employed in any of the types of employment arrangements associated with the gig economy. Using an econometric approached based on instrumental variables, we find evidence that the most deleterious well-being effects are found among self-employed workers and for the dimension of well-being based on self-reported health. The self-employed (ownaccount workers) display a 125.8% decrease in average self-reported health levels compared to permanent workers. Our results suggest that the greater job insecurity and precariousness associated with self-employment outweighs the potential positive impact caused by the greater flexibility and autonomy of this type of work.
    Keywords: Digital platform economy, Gig economy, Digital platform work, Self-employment, Temporary jobs, Well-being, Self-reported health, Happiness, Life satisfaction.
    JEL: I31 J21 J81 J40
    Date: 2023–06–15
  9. By: Sam Z. Njinyah (Manchester Metropolitan University, UK); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The purpose of this paper was to examine the relationship between a firm starting operation informally and its future innovation and whether this relation is moderated by institutional support (having access to finance from financial institutions to run their business).Data from the World Bank Enterprise Survey on 30 Eastern European and Central Asian countries were analysed using probit regression analysis. The findings show that there is a positive significant relationship between firms that start operation informally and the firm’s innovation and that such effect persists overtime. The study found that this relationship is stronger if the firms can gain access to finance to expand their business activities. Finally, the results show that such a relationship is based on the type of innovation being pursued by the firm. By examining the moderation effect of access to finance on starting a business informally, the study provides an alternative explanation to policymakers on how to deal with informal firms to benefit from their contribution to growth.
    Keywords: Informality/unregistered firms, innovation, institutions, Eastern European and Central Asian countries
    Date: 2023–01
  10. By: Zelu, Barbara Ama; Iranzo, Susana; Pérez Laborda, Alejandro
    Abstract: Although the impact of micro-credit and direct cash transfers on women economic empowerment has been extensively studied. The impact of just having either a formal or informal bank account remains relatively understudied. This paper uses a detailed national representative data of female household heads in Ghana to analyze how having a formal and informal bank account economically empowers women. Using propensity score matching, our results elicit that having a bank account encourages women to be employed and also increases their per capita income. The results also indicate that, the level of education and sector of employment positively contributes to women’s economic empowerment. Additionally, the result reveal that female household heads living in the cities are more economically empowered than their counterpart living in the rural areas. Keywords: Financial Inclusion · Women Economic Empowerment · Gender Equality · Ghana Jel Codes : D14, D63, G21, G22, O12, O16
    Keywords: Dones-Condicions econòmiques, Ghana, 331 - Treball. Relacions laborals. Ocupació. Organització del treball,
    Date: 2022
  11. By: Yeboah, Samuel
    Abstract: This systematic review examines the impacts of illegal mining on formal employment, and job creation. Through a comprehensive analysis of relevant literature, the study explores the displacement of formal mining activities, job losses, and the indirect economic consequences of illegal mining. The review assesses existing policies and initiatives, identifies gaps in knowledge, and proposes future research directions. The findings emphasize the need for effective enforcement, policy interventions promoting formalization, and international cooperation to address the negative effects of illegal mining on employment. The study contributes to a better understanding of the issue and provides insights for policymakers, industry stakeholders, and researchers.
    Keywords: Illegal mining, formal employment, job creation, displacement, economic consequences, policy interventions, formalization, enforcement, international cooperation
    JEL: Q17 Q32 Q34 Q38
    Date: 2023–04–14
  12. By: Luis Fernando Mejía
    Abstract: El Gobierno nacional ha presentado sus propuestas de reformas en el frente laboral y pensional. Estas dos reformas deben examinarse de forma integral, ya que la muy baja cobertura del sistema obligatorio de pensiones actual (25%) se debe principalmente a la alta informalidad laboral (actualmente en un 58% de la población ocupada). En este sentido, los objetivos de aumentar la cobertura pensional y reducir la informalidad laboral son dos caras de una misma moneda: no será posible mejorar la cobertura en el sistema obligatorio de pensiones si no se hacen esfuerzos para reducir la informalidad laboral. Este documento realiza un análisis de los elementos más importantes de las reformas laboral y pensional, considerando sus impactos, aspectos positivos y negativos, y presenta recomendaciones específicas que podrían mejorar sustancialmente la eficiencia y eficacia de los resultados que se pretenden alcanzar con las reformas.****** Abstract: The national government has put forth proposals for comprehensive labor and pension reforms. These reforms need to be considered together, as the low coverage of the current mandatory pension system (25%) is primarily due to the high prevalence of labor informality (currently at 58% among the employed population). Therefore, the objectives of increasing pension coverage and reducing labor informality are interconnected: improving pension coverage in the mandatory system would require efforts to reduce labor informality. This document provides an analysis of the key elements of the labor and pension reforms, including their impacts, positive and negative aspects, and specific recommendations to substantially enhance the efficiency and effectiveness of the intended outcomes of these reforms.
    Keywords: Reforma Laboral, Reforma Pensional, DesempleoInformalidad, Labor ReformPension Reform, UnemploymentInformality
    JEL: J08 H53 H55
    Date: 2023–03–30

This nep-iue issue is ©2023 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.