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Pathways to Formalization: Going beyond the Formality Dichotomy

Author

Listed:
  • Diaz, Juan Jose

    () (GRADE)

  • Chacaltana, Juan

    () (ILO International Labour Organization)

  • Rigolini, Jamele

    () (World Bank)

  • Ruiz, Claudia

    (ILO International Labour Organization)

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, Jamele & Ruiz, Claudia, 2018. "Pathways to Formalization: Going beyond the Formality Dichotomy," IZA Discussion Papers 11750, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp11750
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    References listed on IDEAS

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    1. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2011. "Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program," Journal of Development Economics, Elsevier, vol. 94(2), pages 262-276, March.
    2. Miriam Bruhn, 2011. "License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 382-386, February.
    3. Melanie Khamis, 2014. "Formalization of jobs and firms in emerging market economies through registration reform," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-67, May.
    4. Lucas Ronconi & Jorge Colina, 2011. "Simplification of Labor Registration in Argentina: Achievements and Pending Issues," IDB Publications (Working Papers) 3827, Inter-American Development Bank.
    5. repec:iza:izawol:journl:y:2014:p:67 is not listed on IDEAS
    6. Suresh de Mel & David McKenzie & Christopher Woodruff, 2013. "The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka," American Economic Journal: Applied Economics, American Economic Association, vol. 5(2), pages 122-150, April.
    7. Mariana Viollaz, 2018. "Enforcement of labor market regulations: heterogeneous compliance and adjustment across gender," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 7(1), pages 1-28, December.
    8. McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24, January.
    9. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2011. "Entry regulation and business start-ups: Evidence from Mexico," Journal of Public Economics, Elsevier, vol. 95(11), pages 1501-1515.
    10. repec:bla:rdevec:v:21:y:2017:i:4:p:939-961 is not listed on IDEAS
    11. Miriam Bruhn & David McKenzie, 2013. "Using administrative data to evaluate municipal reforms: an evaluation of the impact of Minas Fácil Expresso," Journal of Development Effectiveness, Taylor & Francis Journals, vol. 5(3), pages 319-338, September.
    12. Ana Maria Oviedo & Mark R. Thomas & Kamer Karakurum-Ozdemir, 2009. "Economic Informality : Causes, Costs, and Policies - A Literature Survey," World Bank Publications, The World Bank, number 5917, November.
    13. Viollaz, Mariana, 2016. "Enforcement of Labor Market Regulations: Heterogeneous Compliance and Adjustment across Gender," MPRA Paper 72000, University Library of Munich, Germany.
    14. De Giorgi, Giacomo & Ploenzke, Matthew & Rahman, Aminur, 2015. "Small Firms' Formalization The Stick Treatment," CEPR Discussion Papers 10779, C.E.P.R. Discussion Papers.
    15. repec:eee:pubeco:v:157:y:2018:i:c:p:1-14 is not listed on IDEAS
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    More about this item

    Keywords

    informality; business formalization; labor formalization; small enterprises;

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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