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Informality over the life-cycle

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  • Albertini, Julien
  • Terriau, Anthony

Abstract

In developing countries, informality is mainly concentrated among younger and older workers and low-skilled workers. In this study, we propose a dual labor market theory that highlights how frictions and taxation in the formal sector and educational choices interact to shape the informality rate over the life-cycle. We develop a life-cycle model with search frictions, skill heterogeneities, and endogenous educational choices. We carry out a numerical analysis and show that our model reproduces remarkably well the life-cycle patterns of informality, non-employment, and formal employment in Argentina. We analyze several public policies and show that an educational grant reduces both informality and non-employment and may be fully financed by the extra tax revenues generated by the increase in formal employment and wages. Lowering taxes may achieve similar results but is detrimental to the government budget, despite increasing the base on which they are levied.

Suggested Citation

  • Albertini, Julien & Terriau, Anthony, 2019. "Informality over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 182-202.
    • Handle: RePEc:eee:dyncon:v:105:y:2019:i:c:p:182-202
    DOI: 10.1016/j.jedc.2019.06.007
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    Cited by:

    1. Albertini, Julien & Fairise, Xavier & Terriau, Anthony, 2021. "Health, wealth, and informality over the life cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    2. Julien Albertini & Arthur Poirier & Anthony Terriau, 2020. "The impact of EITC on education, labor market trajectories, and inequalities," Working Papers halshs-03082382, HAL.
    3. Albertini Julien & Poirier Arthur & Sopraseuth Thepthida, 2020. "Informal work along the business cycle: evidence from Argentina," IZA Journal of Development and Migration, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 11(1), pages 1-16, January.

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    More about this item

    Keywords

    Informality; Search and matching; Life-cycle; Public policy; Laffer curve;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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