Informal economic activity across countries has been studied thoroughly in the empirical literature, but little research addresses sources of variation in informality on the sub-national level. This paper analyzes reasons for regional variation in informal employment. It develops a theoretical model, which predicts that worker skill endowment, quality of local governance, and social norms are important determinants of the degree of informal employment in a city. The empirical application draws on data from Brazil, where 45 percent of the urban labor force are employed informally. The degree of such employment, however, varies substantially across regions, with some cities having 20 percent or less informal employment and others having 80 percent or more. The empirical evaluation supports the predictions of the model and shows that informal employment is lower in regions with better governance and stronger social norms for compliance with tax and labor regulation. The analysis also supports the notion of a "skill threshold" for successful entry into the formal sector. Endogeneity concerns are raised and assessed along with other robustness checks of the empirical results.
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Paper provided by Lund University, Department of Economics in its series Working Papers with number
2009:10.
Length: 30 pages Date of creation: 26 Apr 2009 Date of revision: Handle: RePEc:hhs:lunewp:2009_010
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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.:
Áureo de Paula & José A. Scheinkman, 2007.
"The Informal Sector,"
NBER Working Papers
13486, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Aureo de Paula & Jose A. Scheinkman, 2007.
"The Informal Sector,"
PIER Working Paper Archive
07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
[Downloadable!]