Informality and trade
Dix-Carneiro and al. in their paper use two definitions of informality: the first, defines a worker as informal if she does not have permanent and stable employment associated with benefits such as health and social security. The second, defines a worker as informal if, in addition to not receiving benefits, she is invisible to the tax authorities and her employer illegally evades labor market regulations. They find:
- The informal sector works as a buffer when the economy is hit with negative shocks. The effects of a negative aggregate productivity shock on unemployment and welfare are larger in an economy without an informal sector.
- Trade: Increasing trade openness, reducing the burden of labor market regulations and growth are not enough to offset the misallocation caused by taxes and a large informal sector.
Trade and Informality in the Presence of Labor Market Frictions and Regulations
Authors: Rafael Dix-Carneiro, Pinelopi Goldberg, Costas Meghir, Gabriel Ulyssea
From: Duke University, World Bank, Yale University, University of Oxford
Informality and inflation
Alberola and Urrutia explore the implications of the presence of the informal sector for inflation stabilization and monetary policy in emerging economies under inflation targeting regimes. They find:
- Inflation: the presence of an informal sector stabilizes inflation when the main perturbations in the economy correspond to demand or financial shocks, but amplifies it under technology shocks.
- When the flexibility of the formal sector increases, measured by the formal labor turnover, the buffering effect of informality is less important and the financial channel plays a central role in overturning some of these results.
Does Informality Facilitate Inflation Stability?
Authors: Enrique Alberola, Carlos Urrutia