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Labor Market Institutions and Informality in Transition and Latin American Countries

Author

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  • Lehmann, Hartmut

    () (University of Bologna)

  • Muravyev, Alexander

    () (Higher School of Economics)

Abstract

This paper analyzes, using country-level panel data from transition economies and Latin America, the impact of labor market institutions on informal economic activity. The measure of informal economic activity is taken from Schneider et al. (2010), the most comprehensive study to date. The data on institutions, which cover employment protection legislation (EPL), the tax wedge, the unemployment benefit level, unemployment benefit duration and union density, are assembled at the IZA (transition countries) and the World Bank (LAC countries). We find that a more regulated labor market (higher EPL) increases the size of the informal economy. There is also evidence that a larger tax wedge increases informality. The tax wedge elasticity of informal economy, when evaluated at the sample mean, is rather modest, around 0.1%. Our results are broadly in line with the literature, which identifies labor market regulation and the tax wedge as important drivers of informality.

Suggested Citation

  • Lehmann, Hartmut & Muravyev, Alexander, 2012. "Labor Market Institutions and Informality in Transition and Latin American Countries," IZA Discussion Papers 7035, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7035
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pablo Lavado & Gustavo Yamada, 2013. "Fear of Labor Rigidities – The Role of Expectations in Employment Growth in Peru," Working Papers 13-16, Centro de Investigación, Universidad del Pacífico.
    2. World Bank Group & Royal Government of Bhutan Ministry of Labor and Human Resources, 2016. "Bhutan’s Labor Market," World Bank Other Operational Studies 25703, The World Bank.
    3. H. Lehmann & A. Zaiceva, 2013. "Informal Employment in Russia: Incidence, Determinants and Labor Market Segmentation," Working Papers wp903, Dipartimento Scienze Economiche, Universita' di Bologna.
    4. Gindling,T. H. & Mossaad,Nadwa & Newhouse,David Locke, 2016. "Earnings premiums and penalties for self-employment and informal employees around the world," Policy Research Working Paper Series 7530, The World Bank.
    5. Pablo Lavado & Gustavo Yamada, 2013. "Fear of Labor Rigidities – The Role of Expectations in Employment Growth in Peru," Working Papers 13-17, Centro de Investigación, Universidad del Pacífico, revised Dec 2013.
    6. Alexander Muravyev, 2014. "Employment protection legislation in transition and emerging markets," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-63, September.
    7. Hartmut Lehmann & Anzelika Zaiceva, 2013. "Informal Employment in Russia: Definitions, Incidence, Determinants and Labour Market Segmentation," OECD Economics Department Working Papers 1098, OECD Publishing.
    8. Lehmann, Hartmut & Zaiceva, Anzelika, 2013. "Re-defining Informal Employment and Measuring its Determinants: Evidence from Russia," IZA Discussion Papers 7844, Institute for the Study of Labor (IZA).
    9. Shkendije Demalijaj Ukaj, 2015. "Income Tax on Wages and Factors Affecting their Tax Evasion - the Case of Kosovo," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(3), pages 59-70, June.

    More about this item

    Keywords

    transition countries; Latin America; labor market institutions; informality; macroeconometric regressions;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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