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on Informal and Underground Economics |
| By: | Ricardo Alonzo Fernandez Salguero |
| Abstract: | This document offers a synthesis of recent economic literature on three interconnected areas of labor markets: informality, the effects of the minimum wage, and monopsony power. Through the consolidation and meta-analysis of findings from multiple existing systematic reviews and meta-analyses, their causes, consequences, and associated public policies are examined. It is concluded that conventional views on these topics often overestimate the magnitude of effects. Policies to reduce informality based solely on lowering formalization costs are largely ineffective, while increased enforcement at the extensive margin shows more promising results. The effects of the minimum wage on employment, measured through the own-wage elasticity (OWE), are consistently modest, suggesting that job losses are limited compared to wage gains. To reconcile and microfound these findings, an integrated theoretical model of firm optimization is introduced, simultaneously incorporating firm heterogeneity, monopsony power, and endogenous formality decisions, rigorously demonstrating how the interaction of these forces can explain the observed empirical regularities. A cross-cutting and significant finding is the omnipresence of publication bias across all these study areas, which tends to inflate the magnitude of the effects reported in the published literature. Corrected estimates of the effects generally approach zero. Meta-regression is established as an indispensable tool for identifying heterogeneity and the true underlying effects in the empirical evidence, compelling a recalibration of both theory and economic policy recommendations towards a more nuanced and integrated approach. |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2509.20465 |
| By: | Erkko Autio (Imperial College London); Kun Fu (Loughborough University London); Donghyun Park (Asian Development Bank); Shu Tian (Asian Development Bank) |
| Abstract: | Using Global Entrepreneurship Monitor and World Bank data, we produce a novel estimation for the prevalence of informal entrepreneurship in 60 countries in the period 2006– 2022. Using a real option framework, we test the effect of business regulation, property rights protection, and the rule of law on formal and informal entrepreneurship prevalence. Finally, we test the influence of a country’s informal entrepreneurship rate on entrepreneurial growth aspirations by individuals. We find that burdensome business regulations increase informal entry relative to formal entry. We also find that stronger property rights and rule of law encourage formal entrepreneurship and discourage informal entrepreneurship. Further, the analysis finds that a high rate of informal entrepreneurship discourages entrepreneurs’ growth aspirations and negatively moderates the relationship between the entrepreneur’s gender and growth aspirations. |
| Keywords: | informal entrepreneurship;institutions;business regulation;rule of law;property rights;entrepreneurial growth aspirations;multilevel |
| JEL: | L26 E26 O43 |
| Date: | 2025–10–06 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021669 |
| By: | Mrs. Sandra Lizarazo; Brandon Joel Tan |
| Abstract: | The informal sector accounts for a large fraction of the economy and labor force in many emerging market and developing economies. This paper develops a dynamic stochastic general equilibrium model of a small open economy with an informal sector. Nominal price and wage rigidities are present in the formal sector, while prices and wages are flexible in the informal sector. Production of traded goods rely more on formal inputs (which can be produced at home or imported) while non-traded goods rely more on informal inputs. We show that, despite its costs, the informal sector can provide a flexible margin of adjustment in labor and product markets which helps buffer the impact of domestic and external shocks. |
| Keywords: | Informality; Shock Propagation |
| Date: | 2025–09–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/190 |
| By: | Selidji Caroline Tossou |
| Abstract: | In this paper, I investigate the 2017 labor market reform in Benin, which reduced firing costs and allowed firms to renew short-term contracts indefinitely. Using micro-data from the Harmonized Household Living Standards Surveys and a two-way fixed effect approach with nearby countries as the control group, I assess the reform's impact on employment, worker tenure, contract types, and wages. My empirical results reveal a 2.6 percentage point (24.5 percent) increase in formal sector employment and a 2.8 percentage point (3.2 percent) reduction in informal employment. Formal sector tenure decreased by 0.23 months for short-term contract workers, reflecting higher turnover, while long-term contract tenure increased by 0.15 months. The likelihood of securing a permanent contract rose by 23.2 percentage points (41.6 percent) in the formal sector, indicating that firms used long-term contracts to retain high-productivity workers. Wages in the formal sector increased by 33.6 USD per month on average, with workers on short-term contracts experiencing a wage increase of 19.6 USD and those on long-term contracts seeing an increase of 23.4 USD. I complement these findings with a theoretical job search model, which explains the mechanisms through which lowered firing costs affected firm hiring decisions, market tightness, and the sorting of workers across sectors. This study provides robust evidence of labor market reallocation and highlights the complex trade-offs between flexibility, employment stability, and wages in a developing country context. |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2510.03668 |
| By: | Deng, Guoying; Du, Pengcheng; Hernandez, Manuel A.; Xu, Shu |
| Abstract: | This paper examines the association between corporate income taxes and labor market informality. We present a theoretical framework showing that a higher tax enforcement can push firms to pass on the burden to workers by reducing their social security compliance as well as downsizing and lowering wages. The model propositions are tested using a regression discontinuity design that exploits a national corporate tax reform in China. We find that for every one percentage point increase in the effective tax rate, firms reduce their probability of making basic social security contributions by 0.8%, their compliance rate by 1.4 percentage points, and the probability of making supplementary contributions by 0.6%, while the number of workers and wages fall by 4.4% and 0.7%, respectively. We observe that the effects are more salient among firms privately owned and controlled, large businesses, and in locations where social security contributions are directly collected by the social security administration. The findings suggest that workers not only bear part of the higher corporate taxes faced by firms, but an increase in firms’ tax burden contributes to social security evasion and informality in labor markets. JEL Codes: H32, H55, J30, J23, H25 |
| Keywords: | taxes; labour market; social security; remuneration; China; Asia; Eastern Asia |
| Date: | 2024–03–18 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:ifprid:140480 |
| By: | Frederico Alencar (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil); Marcus Araripe (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil); Marcelo Arbex (Department of Economics, University of Windsor); Marcio V. Correa (CAEN - Graduate Studies in Economics, Federal University of Ceara, Brazil) |
| Abstract: | This paper quantifies the impact of tax evasion on the labor-income Laffer curve in Brazil. We develop a heterogeneous-agent model with incomplete markets, progressive taxation, and imperfect tax enforcement. Beyond the well-known arithmetic and economic effects, the model highlights a novel evasion effect – higher statutory rates induce greater concealment of income and reduce effective tax collections. Calibrated to Brazilian data, the model shows that the aggregate Laffer curve peaks at a marginal rate of 25.3%, below the current 27.5%. Tax evasion reduces potential revenue by up to 54% (3.1% of GDP), with losses concentrated among high-income households. A disaggregated analysis further reveals heterogeneous responses across income groups, underscoring distributional and policy implications. |
| Keywords: | Laffer Curve, Tax Evasion, Labor Income Taxation, General Equilibrium. |
| JEL: | E20 E60 D85 H26 I10 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:wis:wpaper:2505 |
| By: | Alessandro Belmonte; Vincenzo Bove; Jessica Di Salvatore |
| Abstract: | Can the exposure to civil war make people more motivated to pay taxes and (re)build the state? Our project examines this question in the context of Africa, a region where civil wars have frequently undermined state capacity. We move from the popular Tillian view of war-making as state-making to study how civil wars shape states' capacity to collect and mobilize revenues (i.e. tax compliance and tax morale) in Sub-Saharan Africa. |
| Keywords: | Civil conflict, State capacity, Tax compliance, Tax morale, Discrimination, Ethnicity, Sub-Saharan Africa |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-65 |