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The costs and benefits of informality

The costs and benefits of informality
The costs and benefits of informality
We explore the costs and benefits of informality associated with the informal sector lying outside the tax regime in a two-sector New Keynesian model. The informal sector is more labour intensive, has a lower labour productivity, is untaxed and has a classical labour market. The formal sector bears all the taxation costs, produces all the government services and capital goods, and wages are determined by a real wage norm. We identify two welfare costs of informality: 1. long-term costs of restricting taxes to the formal sector and 2. short-term fluctuation costs of tax changes to finance fluctuations in government spending. The benefit of informality derives from its wage flexibility. We investigate whether taxing the informal sector and thereby reducing its size sees a net welfare improvememnt
DP 02/11
University of Surrey
Batini, Nicoletta
795aec35-6488-4b9d-84b6-30fee6b7fd3a
Levine, Paul
6978934c-ecab-4709-a683-6114445c3fc5
Lotti, Emanuela
e3a301e8-bfbe-4ac7-ba41-5020251171a5
Batini, Nicoletta
795aec35-6488-4b9d-84b6-30fee6b7fd3a
Levine, Paul
6978934c-ecab-4709-a683-6114445c3fc5
Lotti, Emanuela
e3a301e8-bfbe-4ac7-ba41-5020251171a5

Batini, Nicoletta, Levine, Paul and Lotti, Emanuela (2011) The costs and benefits of informality (Discussion Papers in Economics, DP 02/11) Guildford, GB. University of Surrey 34pp.

Record type: Monograph (Discussion Paper)

Abstract

We explore the costs and benefits of informality associated with the informal sector lying outside the tax regime in a two-sector New Keynesian model. The informal sector is more labour intensive, has a lower labour productivity, is untaxed and has a classical labour market. The formal sector bears all the taxation costs, produces all the government services and capital goods, and wages are determined by a real wage norm. We identify two welfare costs of informality: 1. long-term costs of restricting taxes to the formal sector and 2. short-term fluctuation costs of tax changes to finance fluctuations in government spending. The benefit of informality derives from its wage flexibility. We investigate whether taxing the informal sector and thereby reducing its size sees a net welfare improvememnt

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Published date: February 2011
Organisations: Economics

Identifiers

Local EPrints ID: 339202
URI: https://eprints.soton.ac.uk/id/eprint/339202
PURE UUID: 36f07370-2bf8-49c3-a412-d9f01b74915c

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Date deposited: 25 May 2012 09:26
Last modified: 18 Oct 2018 16:32

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