Informality in the Process of Development and Growth
“Informality” is a term used to describe the collection of firms, workers, and activities that operate outside the legal and regulatory systems. It is widespread in the majority of developing countries—in a typical developing economy, the informal sector produces about 35 percent of gross domestic product and employs 70 percent of the labor force. This paper studies informality in the context of economic development by presenting a model and projections that link informality, regulations, migration, and economic growth. This analytical framework highlights the trade-offs between formality and informality, the relationship between the different types of informality, and the connection between them and the forces of labor, capital, and productivity growth. The paper models the behavior of the informal sector based on the following fundamental asymmetry: formal firms confront higher labor costs while informal firms face higher capital costs and lower productivity. Using mandated minimum wages as the policy-induced distortion, the model first studies the static allocation of formal and informal capital and labor in a modern economy. Second, it opens the possibility of labor migration from a rudimentary economy with an ample supply of labor (rural areas or less advanced neighboring countries). Third, the model analyzes the dynamic behavior of the formal and informal sectors, considering how they affect and are affected by economic growth and labor migration. Then, the paper presents projections for the size of labor informality, in the modern and rudimentary economies, in the next two decades for a large group of countries representing all regions of the world. The projections are based on the calibration and simulation of the model and serve to discuss its usefulness and limitations.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.
- James Albrecht & Lucas Navarro & Susan Vroman, 2009.
"The Effects of Labour Market Policies in an Economy with an Informal Sector,"
Royal Economic Society, vol. 119(539), pages 1105-1129, 07.
- Albrecht, James & Navarro, Lucas & Vroman, Susan, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA).
- James Albrecht & Lucas Navarro & Susan Vroman, 2008. "The Effects of Labour Market Policies in an Economy with an Informal Sector," ILADES-Georgetown University Working Papers inv208, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
- James Albrecht & Lucas Navarro & Susan Vroman, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," Working Papers gueconwpa~06-06-06, Georgetown University, Department of Economics.
- Bencivenga, Valerie R & Smith, Bruce D, 1997. "Unemployment, Migration, and Growth," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 582-608, June.
- Valerie R. Bencivenga & Bruce D. Smith, 1995. "Unemployment, migration, and growth," Working Papers 561, Federal Reserve Bank of Minneapolis.
- D'Erasmo, Pablo N. & Moscoso Boedo, Hernan J., 2012. "Financial structure, informality and development," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 286-302.
- Hernan J Moscoso Boedo & Pablo N D’Erasmo, 2009. "Financial Structure, Informality and Development," Virginia Economics Online Papers 374, University of Virginia, Department of Economics.
- Hernan Moscoso Boedo & Pablo D'Erasmo, 2010. "Financial Structure, Informality and Development," 2010 Meeting Papers 319, Society for Economic Dynamics.
- Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-392, May.
- Kar, Saibal & Marjit, Sugata, 2001. "Informal sector in general equilibrium: welfare effects of trade policy reforms," International Review of Economics & Finance, Elsevier, vol. 10(3), pages 289-300, July.
- Rafael La Porta & Andrei Shleifer, 2014. "Informality and Development," Journal of Economic Perspectives, American Economic Association, vol. 28(3), pages 109-126, Summer.
- Rafael LaPorta & Andrei Shleifer, "undated". "Informality and Development," Working Paper 171301, Harvard University OpenScholar.
- Rafael La Porta & Andrei Shleifer, 2014. "Informality and Development," NBER Working Papers 20205, National Bureau of Economic Research, Inc.
- LaPorta, Rafael & Shleifer, Andrei, 2014. "Informality and Development," Scholarly Articles 12343780, Harvard University Department of Economics.
- Bosch, Mariano & Maloney, William F., 2010. "Comparative analysis of labor market dynamics using Markov processes: An application to informality," Labour Economics, Elsevier, vol. 17(4), pages 621-631, August.
- Bosch, Mariano & Maloney, William, 2007. "Comparative analysis of labor market dynamics using markov processes : an application to informality," Policy Research Working Paper Series 4429, The World Bank.
- Bosch, Mariano & Maloney, William F., 2007. "Comparative Analysis of Labor Market Dynamics Using Markov Processes: An Application to Informality," IZA Discussion Papers 3038, Institute for the Study of Labor (IZA).
- Yuki, Kazuhiro, 2007. "Urbanization, informal sector, and development," Journal of Development Economics, Elsevier, vol. 84(1), pages 76-103, September.
- Áureo De Paula & José A. Scheinkman, 2011. "The Informal Sector: An Equilibrium Model And Some Empirical Evidence From Brazil," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 57, pages 8-26, 05.
- Aureo de Paula & Jose A. Scheinkman, 2009. "The Informal Sector: An Equilibrium Model and Some Empirical Evidence from Brazil," PIER Working Paper Archive 09-044, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- repec:dau:papers:123456789/1888 is not listed on IDEAS
- Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
- Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World; Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
- Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
- Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
- Chaudhuri, Tamal Datta, 1989. "A theoretical analysis of the informal sector," World Development, Elsevier, vol. 17(3), pages 351-355, March.
- Prado, Mauricio, 2011. "Government policy in the formal and informal sectors," European Economic Review, Elsevier, vol. 55(8), pages 1120-1136.
- Prado, Jr., Jose Mauricio, 2007. "Government Policy in the Formal and Informal Sectors," Seminar Papers 751, Stockholm University, Institute for International Economic Studies.
- Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730.
- Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
- Saracoglu, Durdane Sirin, 2008. "The informal sector and tax on employment: A dynamic general equilibrium investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 529-549, February.
- Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
- Gupta, Manash Ranjan, 1993. "Rural-urban migation, informal sector and development policies A theoretical analysis," Journal of Development Economics, Elsevier, vol. 41(1), pages 137-151, June.
- Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
- Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
- Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
- Henley, Andrew & Arabsheibani, G. Reza & Carneiro, Francisco G., 2009. "On Defining and Measuring the Informal Sector: Evidence from Brazil," World Development, Elsevier, vol. 37(5), pages 992-1003, May. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:apc:wpaper:2016-076. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nelson Ramírez-Rondán)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.