Informality and poverty: Are these processes dynamically interrelated? Evidence from Argentina

Poverty and informal employment are often regarded as correlated phenomena. Many empirical studies have shown that informal employment has a causal impact on household poverty, mainly through low wages. Yet other studies focus on the reverse causality from poverty to informality, arising from a range of constraints that poverty poses to job holders. Only recently have empirical researchers tried to study the simultaneous two-way relationship between poverty and informality. However, existing studies have relied upon cross sectional data and static econometric models. This paper takes the next step and studies the dynamics of poverty and informality using longitudinal data. Our empirical analysis is based on a bivariate dynamic random effect probit model and recent panel data from Argentina. The results show that both poverty and informal employment are highly persistent processes at the individual level. Moreover, positive spillover effects are found from past poverty on current informal employment and from past informality to current poverty status, corroborating the view that the two processes are also shaped by interrelated dynamics.