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on Informal and Underground Economics |
| By: | Nazim Tamkoc |
| Abstract: | This paper focuses on the role of development in informality through higher wages and expanded production possibilities. First, it uses informal, plant-level survey data across countries to document that on average, richer countries have smaller informal, unregistered plants in terms of employment. This negative relationship holds even after controlling for plant-level characteristics. Then, a dynamic general equilibrium model with incomplete tax enforcement is developed such that formal and informal plants coexist in equilibrium. The model allows for two groups of agents operating in the informal sector: those with lower abilities than workers, and those with abilities falling between workers and formal managers. In the model, when plants become more productive, some agents operating informally choose to be workers and some of them transition into formality due to higher wages and better production possibilities, which decreases the mean size of informal plants. The quantitative results indicate that around 30 percent of the increase in aggregate output due to higher productivity is associated with a roughly one-quarter decline in the mean size of informal plants. |
| Date: | 2024–10–23 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10956 |
| By: | Christopher Alexander Hoy; Filip Jolevski; Anthony Obeyesekere |
| Abstract: | This paper examines the pervasiveness of tax evasion among firms in Indonesia and the characteristics associated with higher levels of noncompliance. Tax evasion is estimated through a randomized, double-list experiment embedded in a nationally representative survey of 2, 955 registered firms. This revealed whether firms pay all the taxes they owe without them having to disclose this directly. Across both list experiments, around a quarter of the firms indirectly reveal that they have evaded taxes. Firms that do not export, face intense competition from informal firms, and believe tax administration is a major obstacle to their business are the most likely to evade taxes. These findings help to inform the enforcement activities of tax authorities in middle-income countries, which face substantial challenges in estimating levels of tax evasion and identifying noncompliant taxpayers. |
| Date: | 2024–07–22 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10857 |
| By: | Yarygina, Anastasiya; Martínez, André |
| Abstract: | In recent years, tax administrations around the globe have leveraged digital transformation to enhance processes and services to improve tax compliance. Massive self-regularization platforms, which identify noncompliant taxpayers, notify them about the detected inconsistencies, and allow them to amend the situation with the tax authority, are prominent examples of the digital transformation of tax administrations. This study presents the results of the randomized controlled trial evaluating the effectiveness of such a self-regularization platform in the Brazilian State of Para. The results show that the platform increased the amount of the taxes paid by 12.78 times and the probability of tax compliance by 236 percent. Overall, the effectiveness of self-regularization in recovering the evaded tax is 60 percent higher than that of the traditional audit-based approach. The amount of the correction in the declared tax increased by 2.33 times, and the probability of correction by 300 percent. Given the low marginal cost of self-regularization, the results suggest that these platforms are a remarkable opportunity for tax administrations to leverage digital transformation effectively and efficiently, improving tax compliance and increasing tax revenue. |
| Keywords: | digitalization;Tax compliance;Taxpayer support |
| JEL: | H26 H30 H32 O38 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13975 |
| By: | Khandelwal, Vatsal; Chacha, Peter W.; Verena Christina Wiedemann; Kirui, Benard K. |
| Abstract: | The spatial configuration of domestic supply chains plays a crucial role in the transmission of shocks. This paper investigates the representativeness of formal firm-to-firm trade data in capturing overall domestic trade patterns in Kenya — a context with a high prevalence of informal economic activity. It first documents a series of stylized facts and shows that informal economic activity is not randomly distributed across space and sectors, with a higher incidence of informality in downstream sectors and smaller regional markets. The paper then links granular transaction-level data on formal firms with data on informal economic activity to estimate a structural model and predict a counterfactual network that accounts for informal firms. The findings show that formal sector data overstates the spatial concentration of aggregate trade flows and under accounts for trade within regions and across regions with stronger social ties. Additionally, the higher the informality in a sector and region is, the more formal sector data underestimates its vulnerability to domestic output shocks and overestimate its vulnerability to import shocks. |
| Date: | 2024–09–30 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10932 |
| By: | Monica Robayo; Balaban, Georgiana; Wronski, Marcin |
| Abstract: | This paper uses statistical matching techniques to assess tax compliance and underreporting of labor income in Romania, overall and for different population groups, including among minimum wage workers, to understand the distributional implications and its links with minimum wage policy and design. Understanding the extent and distribution of tax evasion is relevant for enhancing domestic tax capacity, its redistributive impacts, and the links with social policy, including minimum wage policy. Estimating the average underreporting of income is challenging due to the significant underrepresentation of top incomes in survey data. After censoring, the average underreporting of income is 6 percent. When looking at the distribution of tax evasion, the analysis also shows significant underreporting of income in the bottom half of the income distribution. The results show that tax-reported income at the median of the income distribution equals only 90 percent of the true (survey) income, and at the 25th percentile, this share is 83 percent. Women are more tax compliant than men. Tax compliance varies across sectors of the economy, regions of the country, and demographic groups. Transport, construction, and food and accommodation are the sectors of the economy with the lowest tax compliance. The underreporting of income results in lower fiscal capacity for the country and may also lower the efficiency of means-tested social assistance. The underreporting of income significantly increases the share of minimum wage earners, which may impact the minimum wage policy. |
| Date: | 2024–10–02 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10940 |
| By: | Choi, Yunji; Mario Gronert; Maddalena Honorati; Merfeld, Joshua D.; David Newhouse |
| Abstract: | This paper explores trends in and the potential determinants of the types of jobs held by workers, and their relationship with poverty reduction, in an unbalanced panel of 89 countries over the past 30 years. Jobs are classified into five categories according to formality, occupation or level of skills required, and wage work versus self-employment. Net shifts into "upper tier" or skilled informal wage jobs, defined as professionals, managers, technicians, or clerks, from "lower tier" or lower skilled informal jobs were strongly associated with poverty reduction at the $1.90 and $3.20 lines. In contrast, net shifts into formal wage jobs from lower tier informal jobs were associated with modest poverty reductions at the $5.50 poverty line. The share of workers in informal upper tier jobs represents less than 2 percent of the workforce and has increased little over the past 30 years in low- and middle-income countries. The findings show that increases in upper tier informal wage jobs are associated with shifts of the workforce from microenterprises to small firms in lower- and upper-middle-income countries, but they are not discernibly associated with higher educational attainment or urbanization. In contrast, increases in the share of formal wage jobs are strongly associated with increases in the share of workers with post-secondary education, driven by high-income countries. The results suggest that upper tier informal wage jobs and the skills they require play a potentially important role in poverty reduction but are not automatically generated by increased educational attainment, urbanization, or firm size. |
| Date: | 2024–07–18 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10856 |
| By: | Resende, Davi; Richter, Gabriel; Sant'Anna, Marcelo (Fundação Getulio Vargas); Trindade, André |
| Abstract: | In certain settings, goods can be consumed outside of formal markets (e.g.: theft, counterfeit, or illegal sharing of subscriptions). When the share of informality is large, firms’ pricing decisions can be substantially affected, as the extensive margin - customers migrating to informal consumption - makes demand more elastic. We study this question in the context of electricity theft in Brazil, where stolen energy can represent more than 50% of the total formal market. We use detailed micro data from a major electric utility to estimate a structural model where consumers choose if they want to be formal or informal and then, how much to consume. For identification, we leverage a natural experiment where prices increased permanently to a set of consumers. We use the model to simulate counterfactual scenarios where: (i) theft is not possible, and (ii) the firm uses different pricing strategies. We find that the presence of informality increases the elasticity of demand from 0.24 to 0.39, and reduces monopoly optimal prices by 10.4%. Eliminating theft altogether would allow the firm to reduce prices by 17.7% while keeping profits constant. We also find that price discrimination is an effective tool to reduce informality rates. |
| Date: | 2025–02–06 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:m4ev5_v1 |
| By: | Chee, Liberty (Ca' Foscari University of Venice) |
| Abstract: | After nearly half a century, domestic workers were again tabled on the agenda of the International Labour Conference in 2008. Three short years later, Conference delegates voted to establish the International Labour Organization’s Convention on Domestic Work (C189). This paper builds on the insight that the campaign to push for C189 was taken up by a feminist “velvet triangle”. These networks are usually comprised of women in social movements, femocrats and academics. The informality of these alliances is due, in part, to the gendered marginality of an issue area, allowing for improvisation and agile coalitions. The paper traces the origins of this triangle to bottom-up calls to develop measurement methodologies to make women’s labour “visible” in the UN Conferences on Women, and later in discussions about the informal economy. It then examines the relations among femocrats in the ILO, academics, and the global trade unions in one important element of the campaign – mobilising statistics on domestic workers worldwide. The paper demonstrates how the production and mobilisation of statistical estimates were crucial in making the sector more tractable. It attends to the under-explored effects of the “power of cognitive resources” in the literature. Finally, the article shows that the explicitly political project of the women’s movements yielded not only a normative labour instrument, but advances in different fields of study. This case shows that the production of scientific knowledge, while still an overwhelmingly elite endeavour, need not always cater to elite demands. |
| Date: | 2024–10–24 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:9fbu7_v1 |
| By: | Burgi, Constantin; Shoghik Hovhannisyan; Camilo Mondragon Velez |
| Abstract: | Economic growth is often associated with welfare gains through job creation. However, the number and quality of new job opportunities created in a growing economy vary across countries and sectors, due in great part to changes in labor productivity. This paper provides estimates of country and sector-specific GDP-employment elasticities based on data from the past two decades, including an evaluation of the predictive power among alternative methodological approaches. The results show that employment elasticities of growth vary significantly across countries and sectors, but are in most cases below 1.0, implying that employment grows less than GDP due to increasing productivity. Across sectors, agriculture has mostly lower elasticity values, becoming negative for more than one-third of developing countries. In addition, increases in labor productivity are associated with reductions in informal employment. These empirical results are in line with the implications of a theoretical model about the relationship between GDP growth, job creation, and labor productivity in economies with varying levels of productivity and informality. |
| Date: | 2024–12–02 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10989 |
| By: | Roosa Lambin; Winnie C. Muangi; Milla Nyyssölä |
| Abstract: | This working paper examines Tanzania's social protection system amidst growing humanitarian crises driven by climate change, health epidemics, and regional conflicts. It explores the social protection needs experienced in humanitarian settings, the challenges in implementation and expansion of social protection schemes, and the opportunities for future policy reform to move towards shock-responsive systems. The study underscores the importance of integrating humanitarian responses into national social protection frameworks and expanding social protection to informal sector groups. |
| Keywords: | Social protection, Crisis, Climate change, Health shocks, Vulnerability, Tanzania |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-4 |