1 labor informality bill maloney lcrce
TRANSCRIPT
1
Labor Informality
Bill MaloneyLCRCE
www.worldbank.org/laceconomistwww.worldbank.org/wmaloney
2
Informality is a poor country issue, no matter how it is measured.
0
10
20
30
40
50
60
70
80
90
100
- 10,000 20,000 30,000 40,000
Latin America Advanced Countries Rest of the world
Lac
k of
Pen
sions
(% L
abor
For
ce) 1
/
2005 GDP per capita PPP adjusted
2 Measures of Informality vs Income per Capita
0
10
20
30
40
50
60
- 10,000 20,000 30,000 40,000
Latin America Advanced Countries Rest of the world
Self
Em
ploy
men
t (%
of L
abor
For
ce) 2
/
2005 GDP per capita PPP adjusted
Def: Legal/Social Protection Def: Productive
3
Why do we care? Unprotected workers: issue of welfare, equity and
efficiency Productivity: firms too small? Barriers to growth? Indicator of regulatory distortions Low and distorted tax collections and poor provision
of public services Weak rule of law and Governance: A problem in our
social contract?
4
Exit and Exclusion Traditional exclusion view of informality
Labor: inferior jobs in a segmented market Firms: denied access to services by high entry costs (de Soto)
Exit view: agents analyze costs vs. benefits of becoming formal Labor: informality offers flexibility, avoidance of poorly designed
benefits programs, and provides “decent” work Firms: don’t need/want State programs, don’t pay for them Larger firms and individuals: Why pay taxes if can avoid?
Both exist to varying degrees across countries but have different implications for policy
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The Informal WorkerComparative Advantage and Constraints
6
3 margins of informalityMargins of Informality
0
5
10
15
20
25
30
35
Firm Size - workers (q)
Sh
are
of
lab
or
forc
e
Formal Informal
Intersectoral Margin (firms) DeSoto
Modern FirmsMicro Firms
Intersectoral Margin (labor)
Intersectoral Margin (labor)
Intrafirm Margin
Maloney 2006)
8
Intrafirm Margin-not central story Most informal workers found in small firms
The allocation of Informal Workers across firm size
75% of Mexican and Argentine in firms of at most 5 workers However, expansion in large firms in Arg, Bra over 1990s
0
5
10
15
20
25
30
35
40
45
50
1 2-5 6-10 11-15 16-50 51-100 101-250 250 +
1994
2004
Mexico(Urban Areas)
% o
f Inf
orm
al a
nd S
elf E
mpl
oyed
wor
kers
Firm Size
0
5
10
15
20
25
30
35
40
45
50
1 2 to 5 6 to 25 26 to 100 101 to 500 501 +
1980
2003
Argentina (Gran Buenos Aires)
% o
f Inf
orm
al a
nd S
elf E
mpl
oyed
wor
kers
Firm Size
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Intersectoral (de Soto) Margin (firms) -How many are close to becoming formal? Firm size determined by cost structure (Lucas 1978)- many
may not be close to margin MX: “Reason for not registering” (Woodruff and McKenzie
2006) 75% “business is too small” ~10%- cost of registration, compliance too high
Fajnzylber et al (2006): little “dynamism” in small firms MX: lowering of registration/compliance costs leads to small
and temporary change in registration- .2% of stock of informal. (Kaplan et. al 2006)
BR: Fajnzylber et al (2007) small reaction to SIMPLES program.
Evidence to date suggests that this is not the critical margin.
10
Intersectoral (worker) margin: Competing theories Disadvantaged group of a segmented labor market
Formal: Protected sector/High productivity/Good jobs Informal : Disguised Unemployment/Low productivity Queuing to get job in the formal sector, worse in downturns.
Alternate view here: workers choose among differing job characteristics (Lucas again) Unregulated largely voluntarily microfirm sector. Entrepreneurs weigh pros and cons of formality Firms may have little potential for growth Similar to job-job transitions in US
Conditional wage comparisons are faux amis: Need to look at other indicators, in particular, labor flows
11
Two Distinct Types of Informal Worker
Distribution of informal workers in Latin America
% contributing to social security system
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Chi
le 2
003
Uru
guay
200
4
Bra
zil 2
003
Arg
enti
na 2
005
El S
alva
dor 2
003
Ven
ezue
la 2
003
Mex
ico
2002
Dom
. Rep
ubli
c 20
06
Gua
tem
ala
2002
Col
ombi
a 20
06
Nic
arag
ua 2
001
Ecu
ador
199
8
Bol
ivia
200
5
Peru
200
2
% e
mpl
oyed
wor
kers
Informal Salaried Informal independent
% Not Contributing to Social Security System
12
05
1015
2025
3035
4045
50
15 19 23 27 31 35 39 43 47 51 55 59 63 67
Self-Employed Form Informal
Role of Each Changes across Life-Cycle Informal Salaried
port of entry for youth accumulate experience
for Formal Salaried or independent work
Most in micro firms
Self Employment prevalent among prime
or older have capital and skills
to open a business
Mexico: Employment as share of age cohort
Cunningham (2007)
13
Microfirm Dynamics:Similar to mainstream firms
Mexico
0
10
20
30
40
50
60
18-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65
Age
Per
ce
nt
Entry Rate Exit Rate Self-employment Rate
0
10
20
30
40
50
60
18-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65
Age
Per
cen
t
Entry Rate Exit Rate Self-employment Rate
United States MEXICO UNITED STATES
Firm Entry, Exit, Participation by Age
SE Rate
Exit Rate
Entry RateSE Rate
Exit Rate
Entry Rate
Age Age
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Workers tell us of both exit and exclusion Most (~2/3) of independent
workers are voluntary not queuing for formal
jobs value flexibility, esp. women opting out of Social Protection
Most Informal Salaried are involuntary would prefer to be FS or SE Exceptions Dominican Republic,
Mexico youth: difficulty entering
workforce
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
od
ds
ra
tio
Independent InformalSalaried
Argentina Dominican Republic
Self-rated Poverty Relative to Formal Workers
Source: (Arias 2007)
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Labor Dynamics- The New Frontier
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Mainstream debate on Gross Worker Flows across the cycle Implications for role of informality Nature of the adjustment process
Blanchard and Diamond (1990) Increase in unemployment was due to the increase in the number
of people entering the unemployment pool. Davis and Haltiwanger (1990, 1992) highlight the
importance of job destruction in recessions Stylized fact drives modern models of search such as Mortensen
Pissarides (1994). Shimer (2005) differs: Acyclical separation rates;
Procyclical job finding rate
17
Data: Rotating Panels Mexico 1987-2002, ENEU (Urban Employment Survey)
16 major cities in Mexico Brazil: 1980-2002, PME (Monthly Employment survey)
5 large metropolitan areas Permit following workers across:
Formal, Salaried, Informal Salaried and Informal Self employed sectors
Unemployment and inactivity Following Geweke (1986) map discrete transitions
probabilities to continuous time model.
18
Worker transitions often suggest voluntary entry
.08
.1.1
2.1
4.1
6.1
8S
elf-
Em
ploy
ed
to F
orm
al
.03
.04
.05
.06
.07
For
ma
l to
Se
lf-E
mpl
oym
ent
1987q1 1991q1 1995q1 1999q1 2003q1
Formal to Self-Employment Self-Employed to Formal
Mexico
Self Employment to Formal Salaried
Formal Salaried to Self Employment
Source: Bosch and Maloney (2008)
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And perhaps exclusion after reforms in Brazil
23
45
Sel
f-E
mpl
oym
ent
to F
orm
al
.81
1.2
1.4
1.6
1.8
For
mal
to
Sel
f-E
mpl
oym
ent
1983m1 1988m1 1993m1 1998m1 2003m1time...
Formal to Self-Employment Self-Employment to Formal
Brasil
SE to Formal
Formal to SE
Constitutional and Commercial Reforms
Bosch, Goñi, Maloney (2007)
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The Role of Informality in the Adjustment Process Modern literature focuses on dynamics
“Stock” of unemployment, informality a function of job finding and separation rates
US literature- Volatility of job finding rate across cycle higher than of
separation rate. So movement in unemployment due to less hiring, rather than
more firing (Shimer)
ft
st
st
tqq
qu
*
21
Job separations: IS most volatileMexico Brazil
0.0
5.1
.15
1987q1 1991q1 1995q1 1999q1 2003q1
S-U I-UF-U
0
.02
.04
.06
.08
.1
1983q1 1988q1 1993q1 1998q1 2003q1
S-U I-UF-U
Formal job separations similar to the US. (Countercyclical, low volatility) Job separation in the informal salaried sector is much higher than in the
formal sector, and jump more in downturns. In MX: U driven by IS separations!
Source: Bosch and Maloney (2008)
IS IS
SE SEFS
FS
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Job Finding Rates: FS most volatile
Job Finding in the formal sector is high volatility and highly pro-cyclical similar to the US.
Job finding rates in the Informal sectors are reasonably constant.
Mexico Brazil
.1.2
.3.4
.5.6
1987q1 1991q1 1995q1 1999q1 2003q1
U-S U-IU-F
0.1
.2.3
.41983q1 1988q1 1993q1 1998q1 2003q1
U-S U-IU-F
IS
FS
SE
IS
FS
SE
Source: Bosch and Maloney (2008)
23
Updated view of cyclical adjustments of LDC labor markets
Volatile Formal JF + Constant Informal JF means informal often expands in downturns.
But, why do JF patterns differ across sectors? Exactly analogous to US debate. Shimer (2005):standard search models cannot explain
the magnitude of the fluctuations in job finding rate. Efforts to fix models
Shimer: extreme wage rigidity? Mortensen and Nagypal (2005):maybe not-information
assymetries etc.
24
Why is informality sometimes “Procyclical”
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.41
987
19
88
19
89
19
90
199
1
199
2
199
3
19
94
19
95
19
96
199
7
199
8
199
9
20
00
20
01
20
02
200
3
200
4
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Unconditioned Earnings F/SE Real exchange rate Formal/SE
Mexico
Rel
ativ
e ea
rnin
gs
Rea
l ex
chan
ge
rate
For
mal
/ S
E
Procyclical/Integrated Countercyclical/Segmented
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Why is informality sometimes “Procyclical”
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1 .0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
Unconditioned Earnings F/SE Real exchange rate Formal/SE
Colombia
Rel
ativ
e ea
rnin
gsR
eal e
xcha
nge
rate
For
mal
/ SE
Procyclical/Integrated Countercyclical/Segmented
26
Implications Shows net voluntary entry Modeling (Fiess, Fugazza, Maloney (2007)
Depend on positive shocks To Formal/Tradable To Informal/Nontradable
FS rigidities less binding in booms
Increase in Informality in early 1990s Boom in nontradables: REER appreciation due to boom in capital inflows: opening of Capital account, Exchange Rate Based Stabilization,
improved expectations due to reforms
27
What drives longer term behavior?
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Why does it decrease with development?
0
10
20
30
40
50
60
70
80
90
100
- 10,000 20,000 30,000 40,000
Latin America Advanced Countries Rest of the world
Lac
k of
Pen
sions
(% L
abor
For
ce) 1
/
2005 GDP per capita PPP adjusted
2 Measures of Informality vs Income per Capita
0
10
20
30
40
50
60
- 10,000 20,000 30,000 40,000
Latin America Advanced Countries Rest of the world
Self
Em
ploy
men
t (%
of L
abor
For
ce) 2
/
2005 GDP per capita PPP adjusted
Def: Legal/Social Protection Def: Productive
29
But nature of regulation matters too Bad quality services and protections- why
bother being formal But regulation matters too
Loayza et al (2006) poor gov’t and heavy regulation increase size
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Brazil’s increase? Constitutional change or trade reforms?
Dynamic Panel: 18 Industries, Yearly 1983-2002
Trade Liberalization:
Import Penetration: Muendler (2002) Real effective trade protection rates: Kume et al. (2003)
Constitutional Changes:
Firing Costs: average tenure (in years) of workers fired (average 1983-1987, source: PME) Overtime: proportion of workers working more than 44 hours (average 1983-1987, source:
PME) Union density: % of unionized workers (average 1986 and 1988, source: PNAD)
jtCCDjTRADEjttjjt uCCDTRADEY .*
31
Constitutional change or trade reforms? Regression analysis
Variable Sector Size Industry Differentials Creation Destruction
Dependent (-1) 0.64 *** 0.46 *** 0.07 0.0710.06 0.05 0.07 0.054
Dependent (-2) 0.17 *** 0.18 *** 0.29 *** 0.0530.04 0.05 0.06 0.050
Effective Tariff -1.08 0.03 0.28 * -0.0032.02 0.09 0.16 0.004
Import Penetration -8.17 ** -0.31 *** -0.43 *** -0.0053.19 0.10 0.15 0.005
Tenure 0.44 *** 0.02 * 0.24 *** 0.0000.12 0.01 0.04 0.001
Tenure (-1) -0.24 -0.05 *** -0.32 *** 0.0000.16 0.01 0.02 0.000
Overtime 3.21 *** 0.23 *** -0.78 *** 0.0010.99 0.04 0.04 0.003
Overtime (-1) -5.56 *** -0.29 *** 0.65 *** -0.006 ***1.38 0.06 0.06 0.002
Union 0.21 0.11 -0.56 *** 0.018 ***1.24 0.10 0.16 0.003
Union (-1) 3.07 ** -0.14 * 0.51 *** -0.016 ***1.52 0.07 0.08 0.002
C 14.80 *** 1.53 *** 0.49 *** 0.012 ***3.91 0.26 0.07 0.003
R2 (Weighted) 0.997 0.998 0.765 0.810R2 (Unweighted) 0.986 0.964 0.736 0.378Durbin Watson 2.08 2.06 2.10 2.03Included observations 18 18 18 18Cross-section included 18 18 18 18Total pool observations 324 324 324 324
32
Actual and predicted size of the formal sector in Brazil
65
70
75
80
85
90
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
Actual No trade No Constitution
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Policies to Reduce Informality Reduce opportunity cost of informality: raise productivity in
the formal sector improved Investment Climate higher human capital accumulation
Remove segmenting distortions in labor markets where applicable
Tilt the benefit/cost ratio of firms and workers to opt for formality: removing distortionary incentives in Social Protection Systems, reducing cost of doing business for all firms improving services associated with formality especially for SME’s,
Improve quality and fairness of institutions and policies and even handed enforcement: move social norms towards a culture of compliance. A potential virtuous circle