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Growth and informality: A comprehensive panel data analysis

Author

Listed:
  • Ceyhun Elgin

    (Bogazici University)

  • Serdar Birinci

    (University of Minnesota)

Abstract

In this paper we empirically explore the impact of the presence of informal economies on long-run economic growth. Using a novel panel dataset of 161 countries over the period from 1950 to 2010 we obtain an inverted-U relationship between informal sector size and growth of GDP per capita. That is, small and large sizes of the informal economy are associated with little growth and medium levels of the size of the informal economy are associated with higher levels of growth. We also observe that in high (low) income economies, informal economy size is positively (negatively) correlated with growth. Moreover, when we decompose growth into several components using a simple growth accounting framework, we find that informality is mainly associated with growth in TFP and that this association is different in high and low-income economies.

Suggested Citation

  • Ceyhun Elgin & Serdar Birinci, 2016. "Growth and informality: A comprehensive panel data analysis," Journal of Applied Economics, Universidad del CEMA, vol. 19, pages 271-292, November.
  • Handle: RePEc:cem:jaecon:v:19:y:2016:n:2:p:271-292
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    File URL: https://ucema.edu.ar/publicaciones/download/volume19/elgin.pdf
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    File URL: https://ucema.edu.ar/publicaciones/download/volume19/elgin_appendix.pdf
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    Citations

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    Cited by:

    1. Maiti, Dibyendu & Bhattacharyya, Chandril, 2020. "Informality, enforcement and growth," Economic Modelling, Elsevier, vol. 84(C), pages 259-274.
    2. Dong Frank Wu & Friedrich Schneider, 2019. "Nonlinearity Between the Shadow Economy and Level of Development," IMF Working Papers 2019/048, International Monetary Fund.
    3. Laura Cabeza-GarcĂ­a & Esther B. Del Brio & Mery Luz Oscanoa-Victorio, 2018. "Gender Factors and Inclusive Economic Growth: The Silent Revolution," Sustainability, MDPI, Open Access Journal, vol. 10(1), pages 1-14, January.
    4. Santiago Acosta-Ormaechea & Atsuyoshi Morozumi, 2019. "The value added tax and growth: Design matters," Discussion Papers 2019/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    5. Omodero Cordelia Onyinyechi, 2019. "The Financial and Economic Implications of Underground Economy: The Nigerian Perspective," Academic Journal of Interdisciplinary Studies, Sciendo, vol. 8(2), pages 155-167, July.
    6. Wu, Dong Frank & Schneider, Friedrich, 2019. "Nonlinearity between the Shadow Economy and Level of Development," IZA Discussion Papers 12385, Institute of Labor Economics (IZA).
    7. Sumbal Shahid & Rana Ejaz Ali Khan, 2020. "Informal Sector Economy, Child Labor and Economic Growth in Developing Economies: Exploring the Interlinkages," Asian Development Policy Review, Asian Economic and Social Society, vol. 8(4), pages 277-287, December.
    8. Kerem Cantekin & Ceyhun Elgin, 2017. "Extent And Growth Effects Of Informality In Turkey: Evidence From A Firm-Level Survey," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(05), pages 1017-1037, December.
    9. Santiago Acosta-Ormaechea & Atsuyoshi Morozumi, 2019. "The value added tax and growth: Design matters," Discussion Papers 2019/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    10. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).

    More about this item

    Keywords

    informal economy; growth accounting; panel data;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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