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Modeling the Informal Economy in Mexico. A Structural Equation Approach

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Author Info
Brambila Macias, Jose

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Abstract

This paper uses annual data for the period 1970-2006 in order to estimate and investigate the evolution of the Mexican informal economy. In order to do so, we model the informal economy as a latent variable and try to explain it through relationships between possible cause and indicator variables using structural equation modeling (SEM). Our results indicate that the Mexican informal sector at the beginning of the 1970’s initially accounted for 40 percent of GDP while slightly decreasing to stabilize around 30percent of GDP in the late 1980’s until our days. The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. The results confirm in particular the importance of salaries and excessive regulation as causes of the informal economy in Mexico and confirm a positive relation between informality and GDP.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8504.

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Date of creation: Apr 2008
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Handle: RePEc:pra:mprapa:8504

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Related research
Keywords: Informal Economy Economic Growth Structural Equations

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Find related papers by JEL classification:
C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy

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  1. Dell'Anno, Roberto, . "Estimating the Shadow Economy in Italy: a Structural Equation Approach," Economics Working Papers 2003-7, School of Economics and Management, University of Aarhus. [Downloadable!]
  2. Angel Alañón & M. Gómez-Antonio, 2005. "Estimating the size of the shadow economy in Spain: a structural model with latent variables," Applied Economics, Taylor and Francis Journals, vol. 37(9), pages 1011-1025, May. [Downloadable!] (restricted)
  3. Christopher Bajada & Friedrich Schneider, 2005. "The Shadow Economies Of The Asia-Pacific," Pacific Economic Review, Blackwell Publishing, vol. 10(3), pages 379-401, October. [Downloadable!] (restricted)
  4. Brambila Macias, Jose, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in México," MPRA Paper 8400, University Library of Munich, Germany. [Downloadable!]
  5. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank. [Downloadable!]
  6. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Alañon-Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 197-197, July. [Downloadable!] (restricted)
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  7. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA. [Downloadable!]
  8. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November. [Downloadable!] (restricted)
  9. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  10. Kaufmann, Daniel & Kaliberda, Aleksander, 1996. "Integrating the unofficial economy into the dynamics of post-socialist economies : a framework of analysis and evidence," Policy Research Working Paper Series 1691, The World Bank. [Downloadable!]
  11. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, EconWPA, revised 25 Jul 2005. [Downloadable!]
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