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on Informal and Underground Economics |
| By: | Hala Abou-Ali; Reham Rizk (British University) |
| Abstract: | This paper assesses the impact of informality on household enterprise performance in terms of productivity and size of output. Furthermore, it pinpoints informality determinants with respect to different types of obstacles that impede their growth. The analysis uses the ELMPS 2012 data and finds that a firm’s age and an entrepreneur’s education level have a significant impact on the likelihood of belonging to the informal sector. Moreover, mobile enterprises, agricultural sector and household savings increase the probability of belonging to the informal sector. In sum, the results support the argument that informality has a deterrent impact on the level of productivity and the value of output of household enterprise in Egypt. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:916&r=iue |
| By: | Reham Rizk (British University in Egypt); Hala Abou-Ali |
| Abstract: | The paper attempts to quantify the impact of informal employment on women’s contribution to the household budget. It further pinpoints the socio-economic factors that affect women’s struggle to meet their household needs. Using the Egyptian Labor Market Panel Survey 2012, the analysis reveals that informality decreases women’s contribution to the household budget by 31%. Moreover, women’s educational level, household size, and husband’s education, among other factors, shape women’s involvement in the household budget. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:910&r=iue |
| By: | Sirin Saracoglu |
| Abstract: | This paper analyses the effects of various macroeconomic and labor market policy changes in an economy with an informal sector and significant informal employment, defined as employment which does not abide with labor market regulations, including minimum wage and social security laws. It has been documented in the literature that foreign trade liberalization reforms expose domestic firms to increased foreign competition, leading them to seek ways to cut back production costs, most notably labor costs. Cutting labor costs can be accomplished in one of three ways, including laying off workers (who subsequently look for employment in the informal sector); cutting down or eliminating worker benefits, putting the workers in informally employed or unregistered status; or establishing subcontracting relationships with smaller scale firms which already employ workers informally. In this paper, we concentrate on the first two effects. The effects of increased exposure to foreign competition (in the form of lowered tariffs and subsidies) are examined in the context of a dynamic general equilibrium model of a small open economy with three sectors including an informal sector, a formal sector, an agricultural sector, and a segmented labor market. Additionally, as the timing of domestic labor market policies stimulating flexible employment may coincide with that of trade reforms, we also explore the effects of changes in minimum wage and in social security tax rates, on the allocation of labor in different sectors, as well as the effects on the informal wage.In this paper we utilize a multi-sector Ramsey growth model to observe the dyamics of the baseline economy, and conduct comparative statics with respect to policy experiments at the steady state. In the theoretical model, we examine a small open economy with three production sectors. The production sectors included in the model economy are the agricultural sector, the informal sector and the formal sector. The primary objective in constructing the theoretical model is to analyze the linkages between the formal and informal sectors as capital accumulates and as the economy grows through time. The linkages between these two sectors materialize through the workings of the labor market. The secondary objective is to observe the changes in the production sectors as the economy exposes its markets to increased foreign competition and labor market policy changes. In the model economy, in addition to three production sectors, there are three economic agents: the producer, the household and the government. The production takes place using four production factors: capital, skilled labor, unskilled labor, and land. The household owns all production factors, and generates income from renting them. The formal sector utilizes capital, unskilled labor and skilled labor in production, and produces a traded good which is both an investment and a consumption good. The informal sector uses capital and unskilled labor in production, and produces a non-traded consumption good. The agricultural sector rents land and hires unskilled labor in production, and produces a traded pure consumption good. Although foreign trade of goods are allowed in the model, there is no international mobility in labor and capital. Within the economy, capital is perfectly mobile across all sectors, while the labor market is segmented. Land can be rented in and out only within the agricultural sector. Finally, the government only serves to collect taxes and tariffs, and distribute subsidies and transfers, and has no consumption and investment behavior.Conducting the comparative statics with respect to formal sector subsidies (lowering subsidies to formal sector in the context of liberalization policies) leads to a lower informal output, lower informal wages, lower allocation of unskilled labor in both sectors (formal and informal), but a higher allocation of skilled labor in the formal sector, therefore a higher formal output, and thus a higher overall income in the economy. A devaluation of the domestic currency will have the opposite effects, therefore the task of the policymaker is to find an optimal balance between lowering subsidies in the formal sector, and encouraging formal sector production through a devaluation of the domestic currency. An increase in the minimum wage, on the other hand, creates opposite effects to lowering subsidies, but similar effects with a devaluation of domestic currency: a rise in the minimum wage decreases informal wages, encourages use of unskilled labor in the informal sector, discourages use of unskilled labor in the formal sector, to be substituted by an increase in the use of skilled labor in the formal sector, and raising production there. We can say that the increase in the minimum wage would raise the gap bwetween the wages of the unskilled in the formal sector and the unskilled in the informal sector, rendering the informally employed even more disadvantaged in the labor market. In terms of the dynamic solution of the model, we observe that as capital accumulates and the income grows over time, the formal sector producer shifts from formal skilled labor to formal unskilled labor as the skilled labor wages increase, and as the formal skilled labor wages remain constant at the minimum wage. As the economy progresses over time and informal wages increase, the unskilled labor in the agricultural sector leaves this sector, to be employed in the informal sector, raising output there. Therefore in transition and in the long run, we observe a movement of unskilled labor out of agriculture into the informal sector. |
| Keywords: | Turkey, General equilibrium modeling, Labor market issues |
| Date: | 2015–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:008007:8603&r=iue |
| By: | Bracha, Anat (Federal Reserve Bank of Boston); Burke, Mary A. (Federal Reserve Bank of Boston) |
| Abstract: | Several recent studies find that as of 2015, a significant share of working-age adults in the United States participates in nonstandard work arrangements. Such arrangements tend to lack long-term employment contracts and are often referred to as “gig economy” jobs. This paper investigates the implications of nonstandard or “informal” work for the measurement of employment status and labor market slack. Using original survey data, we find that as of 2015 roughly 37 percent of nonretired U.S. adults participated in some type of informal work, and roughly 20 percent participated in informal income-generating activities that did not exclusively involve renting out their own property or selling their own goods. The survey also elicits an individual’s employment status according to the definitions of the Bureau of Labor Statistics (BLS). While not the majority, a significant share of those who engage in informal work are classified as not being in the labor force; if all informal workers were counted as employed, the U.S. labor force participation rate (as of 2015) would have been 2 percentage points higher. In addition, individuals who are classified as working “part-time for economic reasons”—those who would like a full-time job but cannot obtain full-time hours—have the highest participation rate in informal work and the highest average hours per month. This latter finding suggests that informal work embodies labor market slack, and we offer several pieces of evidence that support the thesis that workers engage in informal work as a way to compensate for weak labor demand and may therefore drop informal work as formal labor market conditions improve. To estimate the amount of labor market slack embodied in informal work, we convert the total hours of informal work performed by those classified as employed part-time into a number of full-time job equivalents. This exercise yields a figure that ranges from roughly 275,000 to roughly 400,000, depending on the specifics of the calculation. At the same time, we point out that a significant share of informal work hours offer higher wages than what the same individuals earn in their formal jobs. Therefore, formal wages may need to increase by a relatively large margin moving forward in order to attract additional labor into the formal sector. |
| Keywords: | informal work; gig economy; BLS employment status; labor market slack |
| JEL: | E26 J21 J22 J46 |
| Date: | 2016–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-29&r=iue |
| By: | Jackline Wahba (University of Southampton); Ragui Assaad |
| Abstract: | Do flexible labor market regulations reduce informal employment? This paper examines the effects of changes in labor regulations on the incidence of formal employment. Using the case of Egypt, we study the effects of the introduction of more flexible labor regulations in 2003, allowing employers to fire workers, on the incidence of formal employment. The change in the labor law provides us with a natural experiment, which can be used to evaluate the impact of such a policy. The findings show that the change in labor law had a positive impact on the incidence of contracted jobs. Thus, our findings support the hypothesis that less rigid labor market regulations increase formal employment. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:915&r=iue |
| By: | Mariana Viollaz (CEDLAS - UNLP) |
| Abstract: | This paper analyzes how changes in the enforcement of labor regulations impact on the compliance rate in a context where the labor rules and the characteristics of the labor inspection system differ by firm size. In addition to the channels analyzed in the existing literature –the deterrence effect of labor inspections and the movement of displaced workers into the informal sector, this paper adds a margin of adjustment not analyzed before: firms can reduce their size to take advantage of lower penalties for violating the labor rules and/or less stringent regulations. I analyze empirically which forces have dominated for workers employed in firms of different size in Peru during 2008-2013. I measure the enforcement of labor regulations as the number of labor inspections per hundred workers at the regional level, and I instrument it using a measure of the arrival cost of labor inspectors to the firms. The findings reveal that the degree of enforcement had little impact on the compliance with labor regulations. The effect of firms reducing their size to enjoy lower fines and/or less stringent regulations was small in magnitude and the direction of the effect was not clear. The general lack of effect of the enforcement measure on the compliance with the labor rules indicates that the labor inspection system is not effective in Peru, either because it is not able to generate the incentives to comply with labor regulations (e.g. because of lack of resources) or because it fails to overcome the consequences of the adjustment process associated to an increase in the compliance level (e.g. displaced workers moving into the informal sector of the economy). |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:dls:wpaper:0205&r=iue |
| By: | Halkos, George; Papageorgiou, George |
| Abstract: | Public debt accumulation results to disutility with the problem addressed as whether time path of the public debt is sustainable. In this study the infinite time differential game modeling is used as appropriate tool for the economic analysis that follows. The dynamic game is simple and assumes that the starting point of the public debt model is the well known accounting identity interrelating public debt, interest rate and real government surplus exclusive of interest payments on public debt. In the setting, we consider as stock the public debt and the stress of the regulator is to raise nation’s primary surplus. Any surplus increase is not only dependent on government measures, but is also dependent on the known “culture of corruption” and on tax evasion. Thus the process of surpluses’ augmentation should be a function of these two factors. Nash and Stackelberg differential game approaches are used to explore strategic interactions. In the Nash equilibrium establishment of cyclical strategies during the game between the group of people involved in illegal activities of corruption and tax evasion in one hand and the government in the other, requires that the discount rate of the group of people involved in illegal actions must be greater than government’s discount rate. That is the group of corrupt officials and evaders must be more impatient than government. In the case of hierarchical setting analytical expressions of the strategies and the steady state value of public debt stock are provided. Furthermore a number of propositions are stated. |
| Keywords: | Public debt; Tax evasion; Dynamic games; Nash equilibrium; Stackelberg equilibrium |
| JEL: | C72 H26 H62 H63 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77519&r=iue |
| By: | Meinzer, Markus |
| Abstract: | Automatic exchange of information (AEoI) for tax purposes has become the global standard for international tax cooperation in 2013. As a tool for containing offshore tax evasion, it has encountered opposition in the past and continues to be fraught with challenges. This paper recapitulates the rationale for AEoI, including estimates on the magnitudes of assets held offshore, with a specific focus on Turkish assets held in Germany (chapter 1). Subsequently, chapter 2 summarises the recent history and describes the processes and milestones until breakthrough for global AEoI in 2013. Chapter 3 then discusses three current challenges, including the de facto exclusion of developing countries; how to incentivise recalcitrant jurisdictions to participate, such as the USA; and issues around the implementation of the CRS, including OECD’s Global Forum of Transparency and Exchange of Information, the peer reviews and public statistics. Chapter 4 concludes. |
| Keywords: | Offshore Finance, International Cooperation, Money Laundering, Economic Development, Developing Countries, Tax Havens, Secrecy Jurisdictions |
| JEL: | F3 F5 F53 |
| Date: | 2017–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77576&r=iue |
| By: | Alexander Libman (Ludwig-Maximilians-University of Munich and ICSID, National Research University Higher School of Economics); Janis N. Kluge |
| Abstract: | Which incentives have the strongest impact on the size of the shadow economy? Is it about government’s pressure against entrepreneurs operating in this sector, or is it about the benefits of legality? The goal of this paper is to explicitly contrast the role of sticks (court repressiveness) and carrots (financial aid to small and medium-sized firms) as factors determining the size of the shadow economy, using the case of the Russian taxi market. It uses a unique dataset of taxi licensing data from regional transport departments and indicators for taxi market demand to estimate the extent of informal business. When controlling for market demand, it finds a strong and robust positive effect of sanctions on the size of the official market, with higher repressiveness leading to a smaller shadow economy. In contrast, the effect of carrots was insignificant. The results suggest that the effectiveness of carrot policies is compromised when entrepreneurs operate informally to avoid dealing with corrupt bureaucrats and have low trust in the government. |
| Keywords: | shadow economy; bureaucracy; corruption; development policy |
| JEL: | D73 D78 O17 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:364&r=iue |
| By: | Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University) |
| Abstract: | In Pennsylvania local property taxes are collected by elected officials, known as tax collectors, whose compensation varies widely in both structure and level across municipalities. This paper analyses the existence of a pay-performance relationship for these officials. Using data on the percentage of real estate taxes that are actually collected at the municipal level, the paper finds that as the compensation tax collectors receive goes up, they collect more in taxes. This relationship is however true only for collectors who are compensated on a commission basis and not for collectors compensated on the basis of a flat salary. The paper also finds no relationship between the share of votes received by the tax collector and the percentage of property taxes collected during the previous term. This observation may account for the lack of a positive relationship between pay and performance for collectors compensated on the basis of a salary. |
| Keywords: | Tax Collectors; Politician Salary; Productivity; Pay for Performance |
| JEL: | H70 J45 J33 D72 M52 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:34&r=iue |
| By: | Simplice Asongu (Yaoundé/Cameroun); Jacinta C. Nwachukwu (Coventry University, UK) |
| Abstract: | This study assesses the role of ICT (internet and mobile phone penetration) in complementing financial sector development (financial formalization and informalization) for financial access. The empirical evidence is based on Generalised Method of Moments with 53 African countries for the period 2004-2011. The following findings are established from linkages between ICT, financial sector development and financial activity. First, the interaction between ICT and financial formalization (informalization) decreases (increases) financial activity. Second, with regards to net effects, the expected signs are established for the most part. In spite of the negative marginal effects from financial informalization, the overall net effects are positive. Third, the potentially appealing interaction between ICT and informalization produces positive thresholds that are within ranges. Policy implications are discussed in three main strands. They include implications for (i) mobile/internet banking; (ii) a quiet life and (iii) ICT in reducing information asymmetry and surplus liquidity. |
| Keywords: | Allocation efficiency; Financial sector development; ICT |
| JEL: | G20 G29 L96 O40 O55 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:17/006&r=iue |