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Modelling the Informal Economy in Mexico. A Structural Equation Approach

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Author Info
José Brambila Macias () (Department of Economics, University Of Venice Cà Foscari)
Guido Cazzavillan (Department of Economics, University Of Venice Cà Foscari)

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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). The model uses tax burden, salary levels, inflation, unemployment and excessive regulation as potential incentives or deterrents for the informal economy. Our results indicate that the Mexican informal sector at the beginning of the 1970’s accounted for 40 percent of GDP, and then it slightly decreased to stabilize around 30 percent of GDP from the late 1980’s onwards. The results also confirm the importance of salaries and excessive regulation as causes of the informal economy in Mexico and the existence of a positive relationship between informality and GDP.

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Publisher Info
Paper provided by University of Venice "Ca' Foscari", Department of Economics in its series Working Papers with number 2008_41.

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Length: 17
Date of creation: 2008
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Handle: RePEc:ven:wpaper:2008_41

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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
E27 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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  1. Roberto Dell’Anno & Miguel Gómez-Antonio & Angel Pardo, 2007. "The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach," Empirical Economics, Springer, vol. 33(1), pages 51-84, July. [Downloadable!] (restricted)
    Other versions:
  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. Friedrich Schneider & Bettina Hametner, 2007. "The shadow economy in Colombia: size and effects on economic growth," Economics working papers 2007-03, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
  4. 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)
  5. Brambila Macias, Jose, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in México," MPRA Paper 8400, University Library of Munich, Germany. [Downloadable!]
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  6. Guillermo Javier Vuletin, 2008. "Measuring the Informal Economy in Latin America and the Caribbean," IMF Working Papers 08/102, International Monetary Fund. [Downloadable!]
  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. Roberto Dell’Anno & Friedrich G. Schneider, 2006. "Estimating the underground economy by using MIMIC models: A response to T. Breusch´s critique," Economics working papers 2006-07, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
  10. 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)
  11. Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, EconWPA, revised 25 Jul 2005. [Downloadable!]
  12. 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!]
  13. Roberto Dell'Anno & Offiong Helen Solomon, 2008. "Shadow economy and unemployment rate in USA: is there a structural relationship? An empirical analysis," Applied Economics, Taylor and Francis Journals, vol. 40(19), pages 2537-2555. [Downloadable!] (restricted)
  14. 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!]
  15. 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!]
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