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Business Informality in Colombia: An Obstacle For Creative Destruction

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  • Carolina Ydrovo Echeverry

Abstract

This document studies the effects of business informality in terms of distortions in resource absorption, particularly labor, by informal companies. It also assesses the consequences of lower demand for labor of informal firms over aggregate productivity. With firm level data from the DANE Micro-establishments Survey, a matching exercise between formal and informal firms is conducted. It was found that the latter hire fewer employees than formal firms with the same characteristics, including Total Factor Productivity. The matching results allow using counterfactual demands of labor of informal firms to calculate and compare the real and counterfactual aggregate productivity levels. The results indicate that if informal firms would demand the amount of employment demanded by similar formal firms, market share distributionof firms would improve and this would positively affect aggregate productivity.

Suggested Citation

  • Carolina Ydrovo Echeverry, 2010. "Business Informality in Colombia: An Obstacle For Creative Destruction," Documentos CEDE 7198, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:007198
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    References listed on IDEAS

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    1. Aureo de Paula & Jose A. Scheinkman, 2006. "The Informal Sector," Levine's Bibliography 122247000000001030, UCLA Department of Economics.
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    More about this item

    Keywords

    Informal sector; Labor demand; Factor demand; Aggregate productivity; Colombia.;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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