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Pathways to formalization : going beyond the formality dichotomy -- the case of Peru

Author

Listed:
  • Diaz,Juan Jose
  • Chacaltana,Juan
  • Rigolini,Iamele P.
  • Ruiz,Claudia

Abstract

Too often, academics and policy makers interpret formality as a binary choice and formalization as an irreversible process. Yet, formalization has many facets and shades on the business and labor fronts, and firms may not be able or willing to formalize all at once. This paper explores the joint process of business and labor formalization, using a unique panel data set of Peruvian micro enterprises. The paper finds that business formality does not imply labor formality, and vice versa. Further, there is significant churning in and out of different dimensions of formality within a relatively short period. Using an instrumental variable approach, the paper infers that business formalization affects labor formalization but not the other way around, and that enforcement is a key driver of formalization. Overall, the analysis shows that formalization is a gradual and reversible process, with small entrepreneurs weighing their possibilities in each pathway to business (often) or labor (less often) formalization, but rarely both at the same time.

Suggested Citation

  • Diaz,Juan Jose & Chacaltana,Juan & Rigolini,Iamele P. & Ruiz,Claudia, 2018. "Pathways to formalization : going beyond the formality dichotomy -- the case of Peru," Policy Research Working Paper Series 8551, The World Bank.
    • Handle: RePEc:wbk:wbrwps:8551
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    Cited by:

    1. François Langot & Rossana Merola & Samil Oh, 2022. "Can taxes help ensure a fair globalization?," International Economics, CEPII research center, issue 171, pages 191-213.
    2. Liepmann, Hannah & Pignatti, Clemente, 2024. "Welfare effects of unemployment benefits when informality is high," Journal of Public Economics, Elsevier, vol. 229(C).
    3. Daniil A. Sitkevich, 2022. "Shadow economy: To legalise or to tolerate?," Journal of New Economy, Ural State University of Economics, vol. 23(3), pages 6-22, October.
    4. Jiménez, Bruno & Rendon, Silvio, 2023. "Does employment protection unprotect workers? The labor market effects of job reinstatements in Peru," Labour Economics, Elsevier, vol. 80(C).

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