The informal sector, which produces legal goods but does not comply with government regulations, is a functioning part of all economies, with a proportion of the labor force ranging from 17 percent in OECD countries to 60 percent in developing countries. Using a dynamic model that includes an informal sector, this paper illustrates the natural dynamics of the sector, describes how tax policy affects its size, and quantifies the costs of having it. Simulations yield movements in informal employment and output consistent with empirical observations. We find that the U.S. informal sector accounts for about 5 percent of U.S.labor hours and produces about 3 percent of U.S. GDP in steady state. Strategies for reducing the size of the sector are discussed. We find, however, that the distortion from this sector in terms of lifetime loss in an economy's capital stock, is minimal--supporting those who want to keep the informal sector as a functioning part of society.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)