Informality in the Process of Development and Growth
"Informality" is a term used to describe the collection of firms, workers, and activities that operate outside the legal and regulatory systems. It is widespread in the majority of developing countries--in a typical developing economy, th...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Online Access: | http://documents.worldbank.org/curated/en/2016/10/26858497/informality-process-development-growth http://hdl.handle.net/10986/25303 |
| Summary: | "Informality" is a term used
to describe the collection of firms, workers, and activities
that operate outside the legal and regulatory systems. It is
widespread in the majority of developing countries--in a
typical developing economy, the informal sector produces
about 35 percent of gross domestic product and employs 70
percent of the labor force. This paper studies informality
in the context of economic development by presenting a model
and projections that link informality, regulations,
migration, and economic growth. This analytical framework
highlights the trade-offs between formality and informality,
the relationship between the different types of informality,
and the connection between them and the forces of labor,
capital, and productivity growth. The paper models the
behavior of the informal sector based on the following
fundamental asymmetry: formal firms confront higher labor
costs while informal firms face higher capital costs and
lower productivity. Using mandated minimum wages as the
policy-induced distortion, the model first studies the
static allocation of formal and informal capital and labor
in a modern economy. Second, it opens the possibility of
labor migration from a rudimentary economy with an ample
supply of labor (rural areas or less advanced neighboring
countries). Third, the model analyzes the dynamic behavior
of the formal and informal sectors, considering how they
affect and are affected by economic growth and labor
migration. Then, the paper presents projections for the size
of labor informality, in the modern and rudimentary
economies, in the next two decades for a large group of
countries representing all regions of the world. The
projections are based on the calibration and simulation of
the model and serve to discuss its usefulness and limitations. |
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