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on Informal and Underground Economics |
| By: | David Margolis (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, IZA - Institute for the Study of Labor, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, IZA - Forschungsinstitut zur Zukunft der Arbeit (Institute for the Study of Labor) - Bonn Universität - University of Bonn, Paris School of Economics - Université Paris I - Panthéon-Sorbonne); Lucas Navarro (ILADES - Universidad Alberto Hurtado); David A. Robalino (Social Protection and Labor Sector, Human Development Department - The World Bank) |
| Abstract: | This paper analyses the potential impacts of introducing unemployment insurance (UI) in middle income countries using the case of Malaysia, which today does not have such a system. The analysis is based on a job search model with unemployment and three employment sectors: formal and informal wage employment, and self employment. The parameters of the model are estimated to replicate the structure of the labor market in Malaysia in 2009 and the distribution of earnings for informal, formal and self employed workers. The results suggest that unemployment insurance would have only a modest negative effect on unemployment if benefits are not overly generous. The main effect would be a reallocation of labor from wage into self employment while increasing average wages in the formal and informal sectors. |
| Keywords: | Unemployment insurance, Informal sector, Self employment, Job search |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:hal-00714372&r=iue |
| By: | Clement Joubert (Department of Economics, University of North Carolina at Chapel Hill) |
| Abstract: | This paper investigates empirically the fiscal and welfare trade-offs involved in designing a pension system when workers can avoid participation by working informally. A dynamic behavioral model captures a household's labor supply, formal/informal sector choice and saving decisions under the rules of Chile's canonical privatized pension system. The parameters governing household preferences and earnings opportunities in the formal and the informal sector are jointly estimated using a longitudinal survey linked with administrative data from the pension system's regulatory agency. The parameter estimates imply that formal jobs rationing is limited and that mandatory pension contributions play an sizeable role in encouraging informality. Our policy experiments show that Chile could achieve a reduction of 23% of minimum pension costs, while guarantying the same level of income in retirement, by increasing the rate at which the benefits taper off. |
| Keywords: | pension reform, informality, segmentation |
| JEL: | J24 J26 E26 O17 |
| Date: | 2014–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:14-020&r=iue |
| By: | Benjamin, Nancy; Beegle, Kathleen; Recanatini, Francesca; Santini, Massimiliano |
| Abstract: | Many countries have expressed an interest in the size, performance and motivation of the informal sector, especially where the informal sector provides the livelihood and employment for a critical segment of the population. This essay reviews recent literature, methodologies, and relevant Bank studies as a way to share information with country teams interested in expanding their knowledge of the informal sector and related policy debates. Research in a number of regions points to four main areas where development policy can be improved by taking the informal sector into account. First, improvements should be made along a continuum; the heterogeneity among informal firms points to different policy approaches for different types of firms. Second, there should be public-private collaboration on mutual reforms. Many efforts to improve firm performance focus on elements of the production function (labor skills, credit) while treating government mainly as a cost (taxes, cost of compliance with regulations). Yet research reveals that many characteristics of the public regime strongly influence the decisions of firms regarding informality. Third, research indicates a strong relation between basic skills and labor outcomes, particularly in the informal sector, despite the sector's lower average returns. Research also indicates the benefits of targeted training programs. Business services programs have a decidedly mixed record, yet ongoing research is refining results on what works best. Fourth, informal trade is pervasive in developing countries and the networks developed in informal trade -- wholesalers, credit suppliers and money-changers, transporters -- are a strong presence in the informal sector. Yet these kinds of complex and nontransparent trading systems can be discouraging to foreign investors and can otherwise undermine trade policy and the international competitiveness of developing countries. The paper concludes with recommendations. |
| Keywords: | Labor Markets,Banks&Banking Reform,Microfinance,Economic Theory&Research,E-Business |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6888&r=iue |
| By: | Leopoldo Tornarolli (CEDLAS, FCE - UNLP); Diego Battistón (CEDLAS, FCE - UNLP); Leonardo Gasparini (CEDLAS, FCE - UNLP); Pablo Gluzmann (CEDLAS, FCE - UNLP) |
| Abstract: | Labor informality is a pervasive characteristic of the labor markets in Latin America, and a central issue in the public policy debate. This paper discusses the concept of labor informality and implements alternative definitions using microdata from around 300 national household surveys in all Latin American countries. The analysis covers two decades: while labor informality, defined as lack of social protection related to employment, remained with few changes in the 1990s, there is a discernible downward pattern during the 2000s in most countries. These movements reveal a counter-cyclical behavior of labor informality, that may be linked to segmentation in the labor market. |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0159&r=iue |
| By: | Jan-Emmanuel De Neve; Cait Lamberton; Michael I. Norton |
| Abstract: | Two experiments show that eliciting taxpayer preferences on government spending—providing taxpayer agency--increases tax compliance. We first create an income and taxation environment in a laboratory setting to test for compliance with a lab tax. Allowing a treatment group to express nonbinding preferences over tax spending priorities, leads to a 16% increase in tax compliance. A followup online study tests this treatment with a simulation of paying US federal taxes. Allowing taxpayers to signal their preferences on the distribution of government spending, results in a 15% reduction in the stated take-up rate of a questionable tax loophole. Providing taxpayer agency recouples tax payments with the public services obtained in return, reduces general anti-tax sentiment, and holds satisfaction with tax payment stable despite increased compliance with tax dues. With tax noncompliance costing the US government $385billion annually, providing taxpayer agency could have meaningful economic impact. At the same time, giving taxpayers a voice may act as a two-way "nudge," transforming tax payment from a passive experience to a channel of communication between taxpayers and government. |
| Keywords: | Tax compliance, taxpayer agency, taxpayer satisfaction, government spending |
| JEL: | D03 H26 H30 H50 I31 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1270&r=iue |
| By: | Bergolo, Marcelo (IECON, Universidad de la República); Cruces, Guillermo (CEDLAS-UNLP) |
| Abstract: | This article studies how social insurance programs shape individual's incentives to take up registered employment and to report earnings to the tax authorities. The analysis is based on a social insurance reform in Uruguay that extended healthcare coverage to the dependent children of registered private-sector workers. The identification strategy relies on a comparison between individuals with and without dependent children before and after the reform. The reform increased benefit-eligible registered employment by 1.6 percentage points (about 5 percent above the pre-reform level), mainly due to an increase in labor force participation rather than to movement from unregistered to registered employment. The shift was greater for parents with younger children and for cohabiting adults whose partners' jobs did not provide the couples' children with access to the benefit. Finally, the reform increased the incidence of underreporting of salaried earnings by about 4 percentage points (25 percent higher than the pre-reform level), mostly for workers employed at small firms. The increase in fiscal revenue from higher levels of registered employment was several orders of magnitude greater than the loss of revenue due to an increase in underreporting. |
| Keywords: | labor supply, work incentives, social insurance, tax evasion |
| JEL: | J22 H26 O17 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8198&r=iue |
| By: | Best, Michael; Brockmeyer, Anne; Kleven, Henrik; Spinnewijn, Johannes; Waseem, Mazhar |
| Abstract: | This paper analyzes the design of tax systems under imperfect enforcement. A common policy in developing countries is to impose minimum tax schemes whereby firms are taxed either on profits or on turnover, depending on which tax liability is larger. This production inefficient tax policy has been motivated by the idea that the broader turnover tax base is harder to evade. Minimum tax schemes give rise to a kink point in firms' choice sets as the tax rate and tax base jump discontinuously when one tax liability surpasses the other. Using administrative tax records on corporations in Pakistan, we find large bunching around the minimum tax kink. We show that the combined tax rate and tax base change at the kink provides small real incentives for bunching, making the policy ideal for eliciting evasion. We develop an empirical approach allowing us to put (tight) bounds on the evasion response to switches between profit and turnover taxation, and find that turnover taxes reduce evasion by up to 60-70% of corporate income. Our analysis sheds new light on the use of production-inefficient tax tools in countries with limited tax capacity and can easily be replicated in other contexts as the quasi-experimental variation needed is ubiquitous. |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9717&r=iue |
| By: | Khwaja, Munawer Sultan; Iyer, Indira |
| Abstract: | This paper contributes to the empirical literature on the key determinants of the revenue generating potential in 61 countries. The paper uses a broad set of data and econometric methods to conduct analyses that are of relevance to revenue potential. Earlier studies have not distinguished between the revenue potential based on economic fundamentals of countries and that based on what the legal framework prescribes. This study uses a dual approach to revenue potential to examine the issue. Two sets of variables are used, one related to the intrinsic economic structure and strength of countries that affect revenue potential and the other related to tax policy variables. Accordingly the analysis finds two sets of revenue potentials: one can be termed"revenue potential (economic),"and the other"revenue potential (legal)."The difference between the revenue potential (legal) and the actual revenue collected is commonly understood as the"tax gap."The difference between the revenue potential (economic) and the actual revenue collected can be termed the"tax space,"the amount of revenue that a country can afford to collect, given its economic strength, not based on what the parliament has mandated. The results show that legally mandated revenue potentials in countries in Eastern Europe and Central Asia are often higher than the revenue potential based on what the country's economic fundamentals can afford. The paper also makes use of a tax effort index and finds that although many countries are performing close to the revenue potential (economic), it is more difficult to match up to the revenue potential (legal). The relationship between the revenue potential and the shadow economy, value added tax productivity, and some other determinants are examined to test whether some countries are taxing beyond their means. |
| Keywords: | Taxation&Subsidies,Debt Markets,Emerging Markets,Fiscal Adjustment,Tax Law |
| Date: | 2014–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6868&r=iue |
| By: | Marcelo Bergolo (IECON-UDELAR and CEDLAS-UNLP); Guillermo Cruces (CEDLAS-UNLP, CONICET and IZA) |
| Abstract: | This article studies how social insurance programs shape individual’s incentives to take up registered employment and to report earnings to the tax authorities. The analysis is based on a social insurance reform in Uruguay that extended healthcare coverage to the dependent children of registered private-sector workers. The identification strategy relies on a comparison between individuals with and without dependent children before and after the reform. The reform increased benefit-eligible registered employment by 1.6 percentage points (about 5 percent above the prereform level), mainly due to an increase in labor force participation rather than to movement from unregistered to registered employment. The shift was greater for parents with younger children and for cohabiting adults whose partners’ jobs did not provide the couples’ children with access to the benefit. Finally, the reform increased the incidence of underreporting of salaried earnings by about 4 percentage points (25 percent higher than the pre-reform level), mostly for workers employed at small firms. The increase in fiscal revenue from higher levels of registered employment was several orders of magnitude greater than the loss of revenue due to an increase in underreporting. |
| JEL: | J22 H26 O17 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0161&r=iue |
| By: | Asongu Simplice (Yaoundé/Cameroun) |
| Abstract: | The employment of financial development indicators without due consideration to country/regional specific financial development realities remains an issue of substantial policy relevance. Financial depth in the perspective of money supply is not equal to liquid liabilities in every development context. This paper introduces complementary indicators to the existing Financial Development and Structure Database (FDSD). Dynamic panel system GMM estimations are applied. Different specifications, non-overlapping intervals and control variables are used to check the consistency of estimated coefficients. Our results suggest that from an absolute standpoint (GDP base measures), all financial sectors are pro-poor. However, three interesting findings are drawn from measures of sector importance. (1) The expansion of the formal financial sector to the detriment of other financial sectors has a disequalizing income effect. (2) Growth of informal and semi-formal financial sectors at the expense of the formal financial sector has an income equalizing effect. (3) The positive income redistributive effect of semi-formal finance in financial sector competition is higher than the corresponding impact of informal finance. It unites two streams of research by contributing at the same time to the macroeconomic literature on measuring financial development and responding to the growing field of economic development by means of informal financial sector promotion and microfinance. The paper suggests a practicable way to disentangle the effects of the various financial sectors on economic development. The equation of financial depth in the perspective of money supply to liquid liabilities has put on the margin the burgeoning informal financial sector in developing countries. The phenomenon of mobile banking is such an example. |
| Keywords: | Financial Development; Shadow Economy; Poverty; Inequality; Africa |
| JEL: | E00 G20 I30 O17 O55 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:13/036&r=iue |
| By: | Joshua S. Gans |
| Abstract: | There is a puzzle arising from empirical analyses of the impact of music piracy that this has caused declines in music revenue without a consequential decline, and perhaps even an increase, in the entry of artists and the supply of high quality music. There have been numerous explanations posited and this paper adds a novel one: that artists are time inconsistent and hence, tend to underweight fame over fortune when making future choices; i.e., the degree to which they will ‘sell out.’ Regardless of whether selling out is anticipated or not, the puzzle is resolved. When selling out is not anticipated, future expectations of piracy are not a concern as these impact on monetary awards that are not driving entry. When selling out is anticipated, piracy actually constrains the degree to which artists sell out, and assured of that, raises entry returns. Implications and the role of publisher contracts are also explored. |
| JEL: | D03 K11 L82 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20162&r=iue |
| By: | Pablo Villar Vileikis |
| Abstract: | Siguiendo la metodología de análisis de cambio estructural de McMillan y Rodrik (2011), el trabajo investiga la relación entre la distribución sectorial del trabajo y las diferencias salariales en Colombia, incluyendo a los trabajadores informales. Para esto, se usa la información sobre salarios de las encuestas a hogares del DANE de 2002 a 2011. El trabajo hace una propuesta metodológica en la que el crecimiento del salario promedio se explica por el crecimiento de los salarios al interior y a través de los sectores formales e informales y, por separado, como fruto de la formalización del empleo. Se encuentra que el 40% del crecimiento del salario promedio en Colombia es atribuible a la modesta formalización del empleo. |
| Keywords: | Salarios, cambio estructural, Colombia, informalidad |
| Date: | 2013–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:011467&r=iue |