Tax enforcement,technology, and the informal sector

Theoretical models of the informal sector mostly assume—or end up with—a positive correlation between a measure of taxes and the size of the informal sector. However, some recent empirical studies associate higher taxes with a smaller informal sector size. In this paper, we build a theoretical framework—an extension to a two-sector growth model—which allows us to unravel the negative correlation between informal sector size and taxes. We find that (a) a higher degree of tax enforcement, (b) a higher productivity of formal sector households, and (c) a lower physical capital depreciation rate make for a negative relation between these variables. Our results suggest that enforcement and technological factors are likely candidates to account for this relationship.     

Socio-demographics,political attitudes and informal sector employment: A cross-country analysis

In this paper, we empirically investigate the relationship between informal sector employment and micro-level socio-demographic characteristics, political acts and attitudes, and individual norms. Using self-reported individual micro-level data from the World Values Survey for seven developing countries (China, Ecuador, Egypt, Mexico, Peru, South Africa and Yemen), our cross-country regressions and principal component analysis reveal that socio-demographic characteristics of individuals are strong predictors of their informal sector employment. Our estimations further document that individual preferences for an economically strong, interventionist and egalitarian state and confidence in state and political institutions are positively and significantly correlated with informal sector employment, whereas variables associated with confidence in free market institutions and support for competition are negatively and significantly correlated with informal sector employment. We also show that individuals who participate either actively or inactively in peaceful and lawful political processes are significantly less likely to work in the informal sector. Finally, we document that individual norms, such as religiosity and tax morale, are negatively correlated with informal sector employment. Throughout our analysis, instead of having to rely on ad-hoc informality categorizations of third parties, we base our measurement of informal sector employment directly on the self-evaluation of individuals, who have the best information on the degree of their informality.     

Distributional implications of informal economy in the EU countries: Accounting for the spread of tax evasion benefits and cultural characteristics

This study provides evidence about the impact of informal economy on income inequality by using annual cross-country panel data from 28 European Union countries observed during the period 2005–2017. Particular attention is dedicated to the cultural setting which is expected to impact taxpayers’ behaviour and thereby income distribution. The study reveals a relationship between the size of the underground economy and income inequality, which is negative when approaching domestic informality and positive when international tax evasion by individuals is related to the top-bottom income disparity. Moreover, a delay of one-year is needed for these effects to occur, sustaining the hypothesis of secondary consequences of the informality. The study also shows that a set of cultural peculiarities are relevant for the nexus of international tax evasion by individuals and income polarisation. The inequality enhancing effect of the offshore activities is larger in countries with high degree of uncertainty avoidance and power distance, and low level of indulgence and long-term orientation respectively.     

Informality in developing economies: Regulation and fiscal policies

This paper proposes a unified theoretical framework where formal and informal firms coexist and face the same type of product and labor market imperfections: they have monopoly power in the goods market, they are subject to matching frictions in the labor market, and wages are determined by bargaining between large firms and their workers, through either individual or collective bargaining. Our model matches the main stylized facts on informality for developing countries and appears to be a good candidate for policy analysis. In this framework, we study the impact on informality, wages and unemployment of policies that may be used to reduce informality. We consider changes in product market regulation (PMR) and in two types of fiscal policies, labor taxes and formality enforcement. We find that lessening PMR decreases informality and unemployment simultaneously, indicating that there is not necessarily a tradeoff between informality and unemployment. The tradeoff appears when fiscal policies are used, though. Moreover, the impacts of PMR on unemployment and on wages are larger under collective than individual bargaining. With respect to wage inequality, lessening PMR reduces it, while lower taxes tend to increase the formal sector wage premium.     

Misallocation,informality, and human capital: Understanding the role of institutions

The aim of this paper is to quantify the role of formal-sector institutions in shaping the demand for human capital and the level of informality. We propose a firm dynamics model where firms face capital market imperfections and costs of operating in the formal sector. Formal firms have a larger set of production opportunities and the ability to employ skilled workers, but informal firms can avoid the costs of formalization. These firm-level distortions give rise to endogenous formal and informal sectors and, more importantly, affect the demand for skilled workers. The model predicts that countries with a low degree of debt enforcement and high costs of formalization are characterized by relatively lower stocks of skilled workers, larger informal sectors, low allocative efficiency, and measured TFP. Moreover, we find that the interaction between entry costs and financial frictions (as opposed to the sum of their individual effects) is the main driver of these differences. This complementarity effect derives from the introduction of skilled workers, which prevents firms from substituting labor for capital and in turn moves them closer to the financial constraint.     

Spatial Practices and the Institutionalization of Water Sanitation Services in Southern Metropolises: The case of Jakarta and its Kampung Kojan

This article examines the spatial practices and forms of institutionalization in the water and water sanitation sector in Jakarta, capital of Indonesia, and especially in Kampung Kojan in the Kalideres subdistrict of Jakarta. To this end, it develops a three‐layered analytical framework viewing the city as a multi‐scalar socio‐ecological system in which different forms of human–water relations and their institutionalization are found. Particular attention is given to informality in this system and how it interacts with ‘regular’ state and corporate market sector practices. Within these interactive dynamics, informality is not only understood as a survival strategy but also as a creative practice connecting various social‐ecological opportunities, traditional and contemporary technologies and modes of institutionalization to each other. Ongoing institutionalization processes in the formal and informal economy, as well as between them, are analysed. Opportunities to integrate and regularize the diverse water sanitation services into community‐led closed water–wastewater cycles capable of ensuring public health and sustaining a bio‐hydrological balance at the local level are explored.     

THE IMPACT OF LABOR MARKET REGULATION ON EMPLOYMENT IN LOW‐INCOME COUNTRIES: A META‐ANALYSIS

Controversy over labor market policy often centers on achieving a balance between preventing worker exploitation, and avoiding loss of productivity or employment through excessive regulation. Although the literature documenting the impact of labor market regulation on employment is extensive, there is a dearth of evidence on the impact of such policies in low‐income countries (LICs). Since it is easier for workers, especially women, to slip into the informal sector in LICs, regulations are likely to have stronger impacts on formal employment in these countries (but lower impacts on unemployment). We systematically reviewed available research from countries that are, or were until recently, LICs. Most studies document that more stringent labor regulations are associated with lower formal sector employment and higher informal sector employment. We also conducted a metaregression analysis of the impact of minimum wages on formal and informal employment. After controlling for publication bias, higher minimum wages are associated with lower formal employment and a higher share of informal workers.     

Informal entrepreneurship and institutional theory: explaining the varying degrees of (in)formalization of entrepreneurs in Pakistan

In recent years, scholars adopting institutional theory have explained the tendency of entrepreneurs to operate in the informal sector to be a result of the asymmetry between formal institutions (the codified laws and regulations) and informal institutions (norms, values and codes of conduct). The aim of this article is to further advance this institutional approach by evaluating the varying degrees of informalization of entrepreneurs and then analysing whether lower levels of formalization are associated with higher levels of institutional asymmetry. To do this, a 2012 survey of the varying degrees of informalization of 300 entrepreneurs in Pakistan is reported. The finding is that 62% of entrepreneurs operate wholly informal enterprises, 31% largely informal and 7% largely formal enterprises. None operate wholly formal enterprises. Those displaying lower levels of formalization are shown to be significantly more likely to display higher levels of institutional asymmetry, exhibiting greater concerns about public sector corruption, possessing lower tax morality and being more concerned about high tax rates and the procedural and distributive injustice and unfairness of the authorities. These entrepreneurs tend to be lower-income, younger and less-educated entrepreneurs. The article concludes by discussing the theoretical and policy implications of these findings.     

Regulating labour management in small firms

There is a relative paucity of evidence on the management of labour in smaller firms. Research that has been undertaken, while recognising the heterogeneity of the sector, does note the prevalence of informality regarding employee relations. Such informality could be challenged by the increasing regulation of the employment relationship following the election of successive Labour governments since 1997. To illuminate this discussion further, evidence drawn from a study of employment regulation is offered. A number of smaller firm owners and their employees were interviewed to ascertain their views on the impact of regulation on the employment relationship. Owners were largely resistant to it but felt they could accommodate changes with relatively little disruption to their existing approach to labour management. Meanwhile, most employees felt the effect of regulation would be muted due to their position as smaller firm labour.     

Informal Housing in the United States

Research on informal housing tends to focus overwhelmingly on less developed countries, downplaying or ignoring entirely the presence of informality in United States housing markets. In actuality, a longstanding and widespread tradition of informal housing exists in the United States but is typically disregarded by scholars. In this article we draw on three definitions of informality—as non‐compliant, non‐enforced, or deregulated economic activity—to characterize examples of informality in US housing markets, focusing in particular on five institutions that govern housing market activity in this country: property rights law, property transfer law, land‐use and zoning, subdivision regulations, and building codes. The cases presented here challenge the notion that informality is absent from US housing markets and highlight the unique nature of informal housing, US style—namely, that informal housing in the US is geographically uneven, largely hidden and typically interwoven within formal markets. We conclude with a discussion of how research on informal housing in the US can inform research in the global South.     

Green innovation and knowledge: The role of size

This paper reports research on relationship between firm's knowledge sourcing strategy and green innovation. The data are taken from Spanish Technological Innovation Panel survey during 2007–2011. The study contributed to the literature by focusing on the moderating role of firm size on the relationship between knowledge sources and green innovations. Results from over 5,000 firms indicate a shift in the focus from internal knowledge to external knowledge when developing green innovations as firms grow in size. Despite benefits from broad knowledge search on green innovations, the relationship has an inverted U shape. The diminishing returns of knowledge breadth on green innovations are present for smaller firms and disappearing as firms get larger. Government policies promoting more coordination and knowledge complementarity between private and public sector will help to influence more knowledge transfer, ensuring a more sustainable and green economy.     

GOVERNMENT SIZE AND GROWTH: A SURVEY AND INTERPRETATION OF THE EVIDENCE

Abstract The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach – of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time – reveals a more consistent picture. The most recent studies find a significant negative correlation: an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth. One hypothesis is that countries with higher social trust levels are able to develop larger government sectors without harming the economy. Another explanation is that countries with large governments compensate for high taxes and spending by implementing market‐friendly policies in other areas. Both explanations are supported by ongoing research.     

Estimating the effects of the minimum wage in a developing country: A density discontinuity design approach

This paper proposes a framework to identify the effects of the minimum wage on the joint distribution of sector and wage in a developing country. I show how the discontinuity of the wage distribution around the minimum wage identifies the extent of noncompliance with the minimum wage policy, and how the conditional probability of sector given wage recovers the relationship between latent sector and wages. I apply the method in the “PNAD,” a nationwide representative Brazilian cross‐sectional dataset for the years 2001–2009. The results indicate that the size of the informal sector is increased by around 39% compared to what would prevail in the absence of the minimum wage, an effect attributable to (i) unemployment effects of the minimum wage on the formal sector and (ii) movements of workers from the formal to the informal sector as a response to the policy.     

Adopting Proactive Environmental Strategy: The Influence of Stakeholders and Firm Size

abstract While smaller firms are less likely to undertake as many environmental practices as larger firms, extant literature suggests that smaller firms may be more responsive to stakeholder pressures. This paper contributes to the development of stakeholder theory by deriving a size moderated stakeholder model and applying it to a firm's adoption of proactive environmental practices. The empirical results show that smaller firms are more responsive to value‐chain, internal, and regulatory stakeholder pressures. These findings suggest that researchers evaluating organizations and the natural environment should be cautious about associating stakeholder pressures directly with firms' environmental strategies. Rather, the relationship between stakeholder pressures and environmental strategy tends to vary with size.     

Explaining cross-country variations in the prevalence of informal sector competitors: lessons from the World Bank Enterprise Survey

To advance understanding of informal sector entrepreneurship, the aim of this paper is to evaluate and explain the cross-country variations in the prevalence of informal sector competitors. To do so, World Bank Enterprise Survey (WBES) data is reported from 142 countries. This reveals that 27% of formal enterprises view competition from the informal sector as a major constraint on their operations, although this varies from 72% of formal enterprises in Chad to no formal enterprises in El Salvador. To explain these cross-country variations, four competing theories are evaluated which variously view informal sector entrepreneurship and enterprise to be more prevalent when there is either: economic under-development (modernisation theory); high taxes and state over-interference (neo-liberal theory); too little state intervention (political economy theory), or an asymmetry between the laws and regulations of formal institutions and the unwritten socially shared rules of informal institutions (institutional theory). A multilevel probit regression analysis confirms the modernisation and institutional theories, but not the neo-liberal and political theories. Beyond economic under-development, therefore, it is not too much or too little state intervention that is associated with the prevalence of informal sector competition but rather, whether the laws and regulations developed by governments are in symmetry with the norms, values and beliefs of entrepreneurs. The paper concludes by discussing the theoretical and policy implications of these findings.

     

Disentangling the influence of internationalization on sustainability development: Evidence from the energy sector

This paper aims to deepen our understanding of the relationship between firms' internationalization and their sustainability development. We expected firms with a higher level of internationalization to exhibit better environmental management and performance. A sample of 287 publicly traded firms in the energy and energy‐related utilities sector was used to test these relationships. We focused on the energy sector, as energy production and supply have historically accounted for the lion's share of global greenhouse gas emissions. We found that firms' level of internationalization had a positive effect on their environmental management, whereas its effect on environmental performance was not found to be significant. We also tested whether these relationships change when firms' internationalization is oriented towards developing countries. Upon a closer look, the relationship was found to be significant between internationalization towards developing countries and better environmental management, thus contributing to the line of literature that does not support the pollution haven hypothesis.     

Explaining the Normality of Informal Employment in Ukraine: A Product of Exit or Exclusion?

This article evaluates critically the competing explanations for the persistence and growth of informal employment in contemporary societies. These interpret the normality of informality either through a structuralist lens as arising out of “exclusion” from state benefits and the circuits of the modern economy or through a neo‐liberal and/or post‐structuralist lens as driven by the voluntary “exit” of workers out of formal institutions and into this alternative realm. To evaluate critically the validity of these competing explanations, this article reports a 2005/6 survey of informal employment in post‐socialist Ukraine. Analyzing the results of 600 face‐to‐face interviews, the finding is that either/or explanations need to be transcended. Informal employment is neither universally driven by exclusion nor exit. Instead, some participate mostly due to exclusion, others mostly for exit rationales, and some for a combination of the two, with different mixtures across different populations and types of informal employment. The outcome is a call to move towards more context‐bound understandings of the pervasiveness of informality through greater appreciation of the heterogeneity of this sphere and how both exit and exclusion are variously entwined in different settings.     

Mobility,poverty and well-being among the informally employed in Bosnia and Herzegovina

We analyse informal sector employment in Bosnia and Herzegovina (BH), using panel data from the living standards measurement studies. We derive four main conclusions. First, there is significant labour market mobility in BH. Second, those in informal jobs are much more likely to suffer from poverty than formally employed people are. Third, earnings inequality is more pronounced in the informal sector than elsewhere. Fourth, the informally employed report lower levels of life satisfaction compared to most other labour market states. We conclude that, while the informal sector helps people cope, the formal sector provides better prospects for prosperity and well-being.     

The role of the informal sector in investment in Sub-Saharan Africa

For a long time economic researchers condemned the existence of a huge informal sector in economies, viewing it as a deterrent to investment, growth and development. This view is however being confronted with intense criticism particularly in developing countries where formal unemployment is rapidly growing and poverty widely spreading, which in turn is leading to an expanding informal sector. Thus alternative schools of thought that view the informal sector as a source of livelihood to the unemployed and poor have subsequently been developed. However, not much empirical work has been carried out to validate any of these theoretical claims, particularly in African economies. This paper attempts to fill this gap. The findings of the study indicate that there is a positive relationship between informal sector activities and investment. These results suggest a review of the standard thinking towards the role of the informal sector in development.     

Competitive strategy and skills: working out the fit in the fitness industry

It is widely accepted that creating quality products and services requires a well‐trained and skilled workforce. This article seeks to contribute to unpicking the relationship between business strategy and skills in the service sector by presenting research findings from the UK fitness industry. This sector has grown quickly and includes companies that compete on the basis of high‐quality services, alongside those competing largely on cost. If the route to a high‐skills economy is to shift more firms towards the higher‐quality end of the market, we would expect to find employers in these companies making use of a workforce with higher levels of skill. The research from the fitness industry questions this simple relationship, finding that there is no clear link between competitive strategy and skills. As market position is not necessarily the impetus for improving the skills of the workforce, the article then briefly explores what other factors may also be required.