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Labor Market Institutions and Informality in Transition and Latin American Countries

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  • Lehmann, Hartmut

    ()
    (University of Bologna)

  • Muravyev, Alexander

    ()
    (St. Petersburg University GSOM and IZA)

Abstract

This paper analyzes, using country-level panel data from transition economies and Latin America, the impact of labor market institutions on informal economic activity. The measure of informal economic activity is taken from Schneider et al. (2010), the most comprehensive study to date. The data on institutions, which cover employment protection legislation (EPL), the tax wedge, the unemployment benefit level, unemployment benefit duration and union density, are assembled at the IZA (transition countries) and the World Bank (LAC countries). We find that a more regulated labor market (higher EPL) increases the size of the informal economy. There is also evidence that a larger tax wedge increases informality. The tax wedge elasticity of informal economy, when evaluated at the sample mean, is rather modest, around 0.1%. Our results are broadly in line with the literature, which identifies labor market regulation and the tax wedge as important drivers of informality.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7035.

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Length: 47 pages
Date of creation: Nov 2012
Date of revision:
Publication status: forthcoming in: Froelich, M., Kaplan, D., Pages, C., Rigolini, J. and D. Robalino (Eds.): Social Insurance and Labor Markets: How to Protect Workers while Creating Good Jobs, Oxford University Press, 2014.
Handle: RePEc:iza:izadps:dp7035

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Keywords: Latin America; transition countries; labor market institutions; informality; macroeconometric regressions;

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References

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  1. Olivier Blanchard, 2005. "European Unemployment: The Evolution of Facts and Ideas," NBER Working Papers 11750, National Bureau of Economic Research, Inc.
  2. Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 52(2), pages 930-957, 04.
  3. Lehmann, Hartmut & Pignatti, Norberto, 2007. "Informal Employment Relationships and Labor Market Segmentation in Transition Economies: Evidence from Ukraine," IZA Discussion Papers 3269, Institute for the Study of Labor (IZA).
  4. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(2), pages 275-302, May.
  5. Betcherman, Gordon & Daysal, N. Meltem & Pagés, Carmen, 2010. "Do employment subsidies work? Evidence from regionally targeted subsidies in Turkey," Labour Economics, Elsevier, Elsevier, vol. 17(4), pages 710-722, August.
  6. Slonimczyk, Fabian, 2011. "The effect of taxation on informal employment: evidence from the Russian flat tax reform," MPRA Paper 35404, University Library of Munich, Germany.
  7. Yuriy Gorodnichenko & Jorge Martinez-Vazquez & Klara Sabirianova Peter, 2008. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," NBER Working Papers 13719, National Bureau of Economic Research, Inc.
  8. Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
  9. Friedrich Schneider & Andreas Buehn & Claudio E. Montenegro, 2010. "Shadow Economies All over the World: New Estimates for 162 Countries from 1999 to 2007," Working Papers, University of Chile, Department of Economics wp322, University of Chile, Department of Economics.
  10. Cunningham, Wendy V. & Maloney, William F., 1998. "Heterogeneity among Mexico's micro-enterprises - an application of factor and cluster analysis," Policy Research Working Paper Series 1999, The World Bank.
  11. John T. Addison & Paulino Teixeira, 2003. "The Economics of Employment Protection," Journal of Labor Research, Transaction Publishers, Transaction Publishers, vol. 24(1), pages 85-129, January.
  12. J. Kluve & H. Lehmann & C. M. Schmidt, 2007. "Disentangling Treatment Effects of Active Labor Market Policies: The Role of Labor Force Status Sequences," Working Papers 620, Dipartimento Scienze Economiche, Universita' di Bologna.
  13. Kerry L. Papps, 2012. "The Effects of Social Security Taxes and Minimum Wages on Employment: Evidence from Turkey," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 65(3), pages 686-707, July.
  14. David KUCERA & Leanne RONCOLATO, 2008. "Informal employment: Two contested policy issues," International Labour Review, International Labour Organization, International Labour Organization, vol. 147(4), pages 321-348, December.
  15. Hartmut Lehmann & Alexander Muravyev, 2012. "Labour market institutions and labour market performance," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 20(2), pages 235-269, 04.
  16. Jaime Saavedra & Alberto Chong, 1999. "Structural reform, institutions and earnings: Evidence from the formal and informal sectors in urban Peru," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(4), pages 95-116.
  17. Stephen Nickell, 1997. "Unemployment and Labor Market Rigidities: Europe versus North America," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(3), pages 55-74, Summer.
  18. Leonardo Gasparini & Leopoldo Tornarolli, 2007. "Labor Informality in Latin America and the Caribbean: Patterns and Trends from Household Survey Microdata," CEDLAS, Working Papers, CEDLAS, Universidad Nacional de La Plata 0046, CEDLAS, Universidad Nacional de La Plata.
  19. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World," IMF Working Papers 00/26, International Monetary Fund.
  20. Eichhorst, Werner & Feil, Michael & Braun, Christoph, 2008. "What Have We Learned? Assessing Labor Market Institutions and Indicators," IZA Discussion Papers 3470, Institute for the Study of Labor (IZA).
  21. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(1), pages 77-114, March.
  22. Koettl, Johannes & Weber, Michael, 2012. "Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New EU Member States," IZA Discussion Papers 6313, Institute for the Study of Labor (IZA).
  23. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 60(1), pages 126-42, March.
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Citations

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Cited by:
  1. H. Lehmann & A. Zaiceva, 2013. "Informal Employment in Russia: Incidence, Determinants and Labor Market Segmentation," Working Papers wp903, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Hartmut Lehmann & Anzelika Zaiceva, 2014. "Informal Employment in Russia: Definitions, Incidence, Determinants and Labor Market Segmentation," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 098, University of Modena and Reggio E., Dept. of Economics.
  3. Lehmann, Hartmut & Zaiceva, Anzelika, 2013. "Re-defining Informal Employment and Measuring its Determinants: Evidence from Russia," IZA Discussion Papers 7844, Institute for the Study of Labor (IZA).
  4. Pablo Lavado & Gustavo Yamada, 2013. "Fear of Labor Rigidities – The Role of Expectations in Employment Growth in Peru," Working Papers, Departamento de Economía, Universidad del Pacífico 13-17, Departamento de Economía, Universidad del Pacífico, revised Dec 2013.

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