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The costs and benefits of informality

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

Record type: Monograph (Discussion Paper)


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


Local EPrints ID: 339202
PURE UUID: 36f07370-2bf8-49c3-a412-d9f01b74915c

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Date deposited: 25 May 2012 09:26
Last modified: 18 Jul 2017 05:53

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Author: Nicoletta Batini
Author: Paul Levine
Author: Emanuela Lotti

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