nep-iue New Economics Papers
on Informal and Underground Economics
Issue of 2023‒07‒31
seven papers chosen by
Catalina Granda Carvajal
Banco de la República

  1. Are Informal Self-Employment and Informal Employment as Employee Behaviorally Distinct Labor Force States? By Flabbi, Luca; Tejada, Mauricio
  2. Tax policies, informality, and real wage rigidities By Andres García-Suaza; Fernando Jaramillo; Marlon Salazar
  3. Wage Employment, Unemployment and Self-Employment across Countries By Poschke, Markus
  4. Unregistered Firms, Financial Access and Innovation By Sam Z. Njinyah; Simplice A. Asongu
  5. The Impact of Formalization Assistance on Informality: Experimental evidence from Colombian mines By Saavedra, S
  6. Public Disclosure and Tax Compliance: Evidence from Uganda By Tanner Regan; Priya Manwaring
  7. On the need to anticipate behavioral responses to policies: the case of multiple refilings on taxpayer behavior in Ecuador By Gómez-Rámirez, Leopoldo; Sánchez, Gonzalo E.

  1. By: Flabbi, Luca (University of North Carolina, Chapel Hill); Tejada, Mauricio (Diego Portales University)
    Abstract: The paper performs both a parametric and non-parametric analysis to address a fundamental question in the growing literature using search models to study labor market informality: should informal self-employment and informal employment as employee be considered two different labor market states? Both the non-parametric and the parametric tests strongly reject equality between the two states, cautioning against aggregating them in a common "informality state." The parametric model indicates the source of the difference in the high dispersion of informal self-employment income and in the low duration of informal employee jobs.
    Keywords: labor market frictions, search and matching, informality, self-employment
    JEL: J46 J64 O17
    Date: 2023–06
  2. By: Andres García-Suaza; Fernando Jaramillo; Marlon Salazar
    Abstract: Developing countries have a vast informal sector generally associated with low productivity levels. The response of informal employment to tax policies might depend on labor market rigidities. This paper proposes a theoretical framework consisting of a search and matching model with segmentation in the labor market to understand how tax policies and enforcement interact to determine the size of the formal sector. The analytical results show that decreasing payroll taxes increases formal employment demand, and enforcement expenditure decreases informal employment offers. The model suggests that a tax policy combination leads to a significant impact on informality reduction. Moreover, the magnitude of the effect of tax policies depends on real wage rigidities, i.e., when the economy faces high real wage rigidities, the tax policies have a higher effect on informality reduction. **** RESUMEN: Los países en desarrollo presentan un sector informal relevante asociado con bajos niveles de productividad. Los efectos de las políticas tributarias sobre los niveles de informalidad dependen de las rigideces del mercado laboral. En el presente artículo se propone un modelo de busqueda y emparejamiento en un mercado laboral segmentado para entender la interaccion entre las políticas tributarias y la aplicacion de la ley sobre el sector formal. Los resultados analíticos muestran que, disminuir los impuestos a la nomina genera aumentos en la demanda de empleo formal, mientras que un aumento en el gasto de auditar a las empresas disminuye la oferta de empleo informal. El modelo sugiere un impacto significativo en la reduccion de la informalidad al combinar las políticas tributarias. Ademas, la magnitud del efecto de las políticas depende de las rigideces en los salarios reales. De esta forma, cuando la economía presenta altas rigideces en los salarios reales, las políticas tributarias tienen un mayor efecto sobre la reducción de la informalidad.
    Keywords: Informality, payroll taxes, fiscal policy, enforcement, search frictions, shirking, Informalidad, Impuestos a la nómina, Política fiscal, Aplicación de la ley, Busqueda y Emparejamiento
    JEL: E26 E62 J21 J46 J31 O17 K42
    Date: 2023–07
  3. By: Poschke, Markus (McGill University)
    Abstract: Poor countries have low wage employment and high self-employment. This paper shows that they also have high unemployment relative to wage employment, and that self-employment increases with this ratio. To understand the sources of these patterns, I build a search and matching model with choice between job search and self-employment and with learning about matches, and calibrate it to match all transition rates between wage employment, unemployment and self-employment as well as separation hazards by job duration, separately for all 37 countries with available data. Quantitative analysis of the model shows that labor market frictions affect self-employment as much as unemployment. Labor market frictions also reduce aggregate output, not only by raising unemployment, but also by worsening the average quality of both wage employment matches and active self-employment projects.
    Keywords: wage employment, unemployment, self-employment, labor market frictions, occupational choice, productivity
    JEL: O11 E24 J64 L26
    Date: 2023–06
  4. 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
  5. By: Saavedra, S
    Abstract: More than 60% of global employees work in the informal economy. One of the reasons that firms remain in informality is the length and cost of the formalization process. I explore whether assisting in the formalization process could reduce informality in the mining sector in Colombia. The study is a randomized control trial with informal coal and gold mines. After two years of treatment, the formalization assistance treatment did not increase formalization rates, and attrition was high. However, the treatment increased miners’ income but not expenses, suggesting the miners are saving more, possibly for the titling costs. The high attrition and unsuccessful treatment highlight the difficulties of formalizing the mining sector.
    Keywords: Formalization; Mining; Colombia
    JEL: E26 L72 O17
    Date: 2023–07–13
  6. By: Tanner Regan (George Washington University); Priya Manwaring (University of Oxford)
    Abstract: Public disclosure of tax behavior is a promising policy tool for raising tax compliance in low-income countries with limited capacity for alternative enforcement mechanisms. Through a field experiment involving over 65, 000 taxpayers in Kampala, we study effects of reporting delinquents and recognizing compliers and provide evidence on the social determinants of tax compliance. The threat of publicly disclosing delinquency raises compliance, but subsequently disseminating delinquent behavior lowers compliance of others. Public recognition backfires, lowering compliance both for those promised recognition and for those who receive information about compliant taxpayers. These results are consistent with a model of tax evasion with privacy costs to tax eligibility status and limited shame of delinquency. Disseminating tax behavior reduces compliance by lowering compliance beliefs as measured in survey data. Overall, public disclosure policies in this context are limited at raising revenue and enforcement reminder nudges more effective.
    Keywords: property tax, tax morale, public disclosure, shaming
    JEL: O18 H30 H26
    Date: 2023–04
  7. By: Gómez-Rámirez, Leopoldo; Sánchez, Gonzalo E.
    Abstract: In this paper we document the use of multiple refilings to evade taxes using administrative data from Ecuador. Then, we develop a model to study the role of multiple refilings on the behavior of taxpayers that received tax notifications because they under-reported taxes. Our model finds that if multiple refilings are possible, then the better decision for selfish taxpayers is to evade taxes. Differently, the model finds that if multiple refilings are not possible, then for taxpayers who exhibit strong social preferences their better decision is to comply even if the probability of being notified is relatively low. The model also shows that banning the possibility of multiple refilings is a necessary but not sufficient condition to achieve true reporting. Nevertheless, the results imply that for both selfish and socially minded taxpayers, limiting the use of multiple refilings reduces their expected payoff of tax evasion and, therefore, increases the probability of tax compliance.
    Keywords: Tax compliance; refiling; tax evasion; Ecuador; policies future effects
    JEL: C72 H25 H26 K42
    Date: 2023–06

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.