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Income Distribution and the Size of the Informal Sector


  • Diego Winkelried

    (St John's College, Cambridge)


This paper studies the role of income distribution as a determinant of the size of the informal sector in an economy by relying on a channel whereby inequality affects the behaviour of aggregate demand and thus influences the incentives a firm has to become informal. It is further postulated that income distribution affects the response of the informal sector to different fiscal policies, either demand or supply-orientated. The main findings are that high inequality leads to a large informal sector, and that redistribution towards the middle class decreases the size of the informal sector and increases the capacity of fiscal instruments to reduce informality. Empirical evidence for Mexican cities is provided.

Suggested Citation

  • Diego Winkelried, 2005. "Income Distribution and the Size of the Informal Sector," Development and Comp Systems 0512005, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:0512005
    Note: Type of Document - pdf; pages: 26

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    References listed on IDEAS

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    Cited by:

    1. repec:voj:journl:v:63:y:2016:i:3:p:293-312 is not listed on IDEAS
    2. Franck M. Adoho & Djeneba Doumbia, 2017. "Informal sector heterogeneity and income inequality: Evidence from the Democratic Republic of Congo," Working Papers 447, ECINEQ, Society for the Study of Economic Inequality.
    3. Reto Foellmi & Josef Zweimüller, 2010. "Mass versus Exclusive Goods, and Formal-Sector Employment," Diskussionsschriften dp1005, Universitaet Bern, Departement Volkswirtschaft.
    4. Reto Foellmi & Josef Zweimüller, 2011. "Exclusive Goods and Formal-Sector Employment," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 242-272, January.

    More about this item


    Income distribution; market size; informal sector.;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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