Transcript Labor Informality Bill Maloney LCRCE www.worldbank.org/laceconomist

Labor Informality
Bill Maloney
LCRCE
www.worldbank.org/laceconomist
www.worldbank.org/wmaloney
1
Informality is a poor country issue, no
matter how it is measured.
100
Def: Legal/Social Protection
90
80
70
60
50
40
30
20
10
0
-
10,000
20,000
30,000
40,000
Self Employment (% of Labor Force) 2/
Lack of Pensions (% Labor Force) 1/
2 Measures of Informality vs Income per Capita
60
Def: Productive
50
40
30
20
10
0
-
10,000
Advanced Countries
40,000
30,000
2005 GDP per capita PPP adjusted
2005 GDP per capita PPP adjusted
Latin America
20,000
Rest of the world
Latin America
Advanced Countries
Rest of the world
2
Why do we care?

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


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?
3
Exit and Exclusion

Traditional exclusion view of informality



Exit view: agents analyze costs vs. benefits of becoming
formal

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
Labor: inferior jobs in a segmented market
Firms: denied access to services by high entry costs (de Soto)
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
4
The Informal Worker
Comparative Advantage and Constraints
5
3 margins of informality
Margins of Informality
Intersectoral Margin (labor)
35
Intersectoral Margin (labor)
Share of labor force
30
25
Formal
Informal
20
15
Modern Firms
Micro Firms
10
Intrafirm Margin
Intersectoral Margin (firms) DeSoto
5
0
1
2
3
4
5
9
10
25
50
10
0
25
0
50
0
10
00
Firm Size - workers (q)
Maloney 2006)
6
Intrafirm Margin-not central story
Most informal workers found in small firms
75% of Mexican and Argentine in firms of at most 5 workers
However, expansion in large firms in Arg, Bra over 1990s


% of Informal and Self Employed workers
Mexico
(Urban Areas)
50
45
40
35
30
25
20
15
10
5
0
1994
2004
1
2-5
6-10
11-15
16-50
Firm Size
51-100 101-250 250 +
% of Informal and Self Employed workers
The allocation of Informal Workers across firm size
Argentina
(Gran Buenos Aires)
50
45
1980
40
2003
35
30
25
20
15
10
5
0
1
2 to 5
6 to 25
26 to 100
101 to 500
501 +
Firm Size
8
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)
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
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

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.
9
Intersectoral (worker) margin:
Competing theories

Disadvantaged group of a segmented labor market
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
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Alternate view here: workers choose among differing job
characteristics (Lucas again)

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


Formal: Protected sector/High productivity/Good jobs
Informal : Disguised Unemployment/Low productivity
Queuing to get job in the formal sector, worse in downturns.
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
10
Two Distinct Types of Informal Worker
Distribution of informal workers in Latin America
% contributing to social security system
Peru 2002
Bolivia 2005
Ecuador 1998
Nicaragua 2001
Colombia 2006
Guatemala 2002
Dom. Republic 2006
Mexico 2002
Informal independent
Venezuela 2003
El Salvador 2003
Argentina 2005
Brazil 2003
Informal Salaried
Uruguay 2004
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Chile 2003
% employed workers
% Not Contributing to Social Security System
11
Role of Each Changes across Life-Cycle
Informal Salaried

Self-Employed
Form
67
63
59
55
51
47
43
prevalent among prime
or older
have capital and skills
to open a business
39

35
Self Employment
31
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27

50
45
40
35
30
25
20
15
10
5
0
23

port of entry for youth
accumulate experience
for Formal Salaried or
independent work
Most in micro firms
19

Mexico: Employment as share
of age cohort
15

Informal
Cunningham (2007)
12
Microfirm Dynamics:
Similar to mainstream firms
Firm Entry, Exit, Participation by Age
Mexico
MEXICO
United States STATES
UNITED
60
60
SE Rate
50
50
40
40
Percent
Percent
Exit Rate
30
30
Exit Rate
20
20
10
10
SE Rate
Entry Rate
0
Entry Rate
Age
Age
0
18-20 21-25
26-30 31-35
Entry Rate
36-40 41-45 46-50 51-55
Exit Rate
Age
56-60 61-65
Self-employment Rate
18-20 21-25 26-30 31-35 36-40 41-45 46-50 51-55 56-60 61-65
Entry Rate
Exit Rate
Age
Self-employment Rate
13
Workers tell us of both exit and
exclusion




Self-rated Poverty Relative
to Formal Workers
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
odds ratio

1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Independent
Argentina
Informal
Salaried
Dominican Republic
Source: (Arias 2007)
14
Labor Dynamics- The
New Frontier
15
Mainstream debate on Gross Worker
Flows across the cycle


Implications for role of informality
Nature of the adjustment process

Blanchard and Diamond (1990)


Davis and Haltiwanger (1990, 1992) highlight the
importance of job destruction in recessions


Increase in unemployment was due to the increase in the number
of people entering the unemployment pool.
Stylized fact drives modern models of search such as Mortensen
Pissarides (1994).
Shimer (2005) differs: Acyclical separation rates;
Procyclical job finding rate
16
Data: Rotating Panels

Mexico 1987-2002, ENEU (Urban Employment Survey)


Brazil: 1980-2002, PME (Monthly Employment survey)
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
5 large metropolitan areas
Permit following workers across:
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

16 major cities in Mexico
Formal, Salaried, Informal Salaried and Informal Self employed
sectors
Unemployment and inactivity
Following Geweke (1986) map discrete transitions
probabilities to continuous time model.
17
.18
Worker transitions often suggest
voluntary entry
.07
Mexico
.1
.12
.14
Self-Employed to Formal
.06
.05
.04
Self Employment to Formal Salaried
1987q1
1991q1
1995q1
Formal to Self-Employment
.08
.03
.16
Formal Salaried to Self Employment
1999q1
2003q1
Self-Employed to Formal
18
Source: Bosch and Maloney (2008)
And perhaps exclusion after reforms in Brazil
1
4
Formal to SE
3
1.2
1.4
1.6
Self-Employment to Formal
1.8
5
Brasil
SE to Formal
1983m1
1988m1
1993m1
time...
Formal to Self-Employment
1998m1
2
.8
Constitutional and
Commercial Reforms
2003m1
Self-Employment to Formal
19
Bosch, Goñi, Maloney (2007)
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
s
q
*
ut  s t f
qt  qt

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)
20
Job separations: IS most volatile
Brazil
.1
.15
Mexico
.08
IS
.05
.04
.06
.1
IS
FS
0
0
FS
SE
.02
SE
1983q1
1987q1
1991q1
1995q1
S-U
F-U
1999q1
I-U
1988q1
1993q1
1998q1
2003q1
2003q1
S-U
F-U
I-U
Source: Bosch and Maloney (2008)

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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.
21
In MX: U driven by IS separations!
Job Finding Rates: FS most volatile
Mexico
.4
.6
Brazil
IS
.4
.3
.5
IS
.2
FS
.1
.3
FS
SE
.1
0
.2
SE
1983q1
1987q1
1991q1
1995q1
U-S
U-F
1999q1
U-I
1988q1
1993q1
1998q1
2003q1
2003q1
U-S
U-F
U-I
Source: Bosch and Maloney (2008)


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.
22
Updated view of cyclical adjustments
of LDC labor markets
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
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.
23
Why is informality sometimes
“Procyclical”
Mexico
1.4
2.6
1.3
2.4
1.2
2.2
2.0
1.0
0.9
1.8
0.8
Formal / SE
Relative earnings
Real exchange rate
1.1
1.6
0.7
1.4
0.6
1.2
0.5
Unconditioned Earnings F/SE
Real exchange rate
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1.0
1987
0.4
Formal/SE
24
Procyclical/Integrated
Countercyclical/Segmented
Why is informality sometimes
“Procyclical”
Colombia
1.6
2.4
2.2
1.4
1.0
1.6
Formal / SE
1.8
0.8
1.4
0.6
1.2
Unconditioned Earnings F/SE
Real exchange rate
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1.0
1986
0.4
1985
Relative earnings
Real exchange rate
2.0
1.2
Formal/SE
25
Procyclical/Integrated
Countercyclical/Segmented
Implications


Shows net voluntary entry
Modeling (Fiess, Fugazza, Maloney (2007)

Depend on positive shocks



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To Formal/Tradable
To Informal/Nontradable
FS rigidities less binding in booms
Increase in Informality in early 1990s
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
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Boom in nontradables:
REER appreciation due to boom in capital inflows:
opening of Capital account, Exchange Rate Based Stabilization,
improved expectations due to reforms
26
What drives longer term
behavior?
27
Why does it decrease with development?
100
Def: Legal/Social Protection
90
80
70
60
50
40
30
20
10
0
-
10,000
20,000
30,000
40,000
Self Employment (% of Labor Force) 2/
Lack of Pensions (% Labor Force) 1/
2 Measures of Informality vs Income per Capita
60
Def: Productive
50
40
30
20
10
0
-
10,000
Advanced Countries
40,000
30,000
2005 GDP per capita PPP adjusted
2005 GDP per capita PPP adjusted
Latin America
20,000
Rest of the world
Latin America
Advanced Countries
Rest of the world
28
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
29
Brazil’s increase? Constitutional
change or trade reforms?
Y jt   j   t  TRADE jt TRADE  D * CC j  D.CC  u jt
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)
30
Constitutional change or trade reforms?
Regression analysis
Variable
Dependent (-1)
Dependent (-2)
Effective Tariff
Import Penetration
Tenure
Tenure (-1)
Overtime
Overtime (-1)
Union
Union (-1)
C
R2 (Weighted)
R2 (Unweighted)
Durbin Watson
Included observations
Cross-section included
Total pool observations
Sector Size
0.64
0.06
0.17
0.04
-1.08
2.02
-8.17
3.19
0.44
0.12
-0.24
0.16
3.21
0.99
-5.56
1.38
0.21
1.24
3.07
1.52
14.80
3.91
0.997
0.986
2.08
18
18
324
Industry Differentials
***
***
**
***
***
***
**
***
0.46
0.05
0.18
0.05
0.03
0.09
-0.31
0.10
0.02
0.01
-0.05
0.01
0.23
0.04
-0.29
0.06
0.11
0.10
-0.14
0.07
1.53
0.26
0.998
0.964
2.06
18
18
324
***
***
***
*
***
***
***
*
***
Creation
Destruction
0.07
0.07
0.29
0.06
0.28
0.16
-0.43
0.15
0.24
0.04
-0.32
0.02
-0.78
0.04
0.65
0.06
-0.56
0.16
0.51
0.08
0.49
0.07
0.071
0.054
0.053
0.050
-0.003
0.004
-0.005
0.005
0.000
0.001
0.000
0.000
0.001
0.003
-0.006
0.002
0.018
0.003
-0.016
0.002
0.012
0.003
0.765
0.736
2.10
18
18
324
***
*
***
***
***
***
***
***
***
***
0.810
0.378
2.03
18
18
324
***
***
***
***
31
Actual and predicted size of the formal
sector in Brazil
90
85
80
75
70
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
65
Actual
No trade
No Constitution
32
Policies to Reduce Informality

Reduce opportunity cost of informality: raise productivity in
the formal sector




Remove segmenting distortions in labor markets where
applicable
Tilt the benefit/cost ratio of firms and workers to opt for
formality:




improved Investment Climate
higher human capital accumulation
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 33
culture of compliance. A potential virtuous circle