Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data
The informal sector is an important source of livelihoods and jobs for a vast majority of people in developing countries. However, there is concern that the informal sector may undermine job creation in the formal sector. According to the “parasite...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2021
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| Online Access: | http://documents.worldbank.org/curated/en/850641611087482004/Does-Competition-from-Informal-Firms-Hurt-Job-Creation-by-Formal-Firms-Evidence-Using-Firm-Level-Survey-Data http://hdl.handle.net/10986/35029 |
| Summary: | The informal sector is an important
source of livelihoods and jobs for a vast majority of people
in developing countries. However, there is concern that the
informal sector may undermine job creation in the formal
sector. According to the “parasite” view of informality,
informal firms can compete against formal firms, and often
"unfairly" so as they do not have to comply with
costly regulations and pay taxes. This "unfair"
advantage makes it difficult for formal firms to compete
against informal firms, implying a significant loss of
formal sector jobs. Using firm-level survey data for
manufacturing small and medium-size enterprises in 109
mostly developing countries, this study estimates the impact
of competition from informal firms on the growth rate of
employment among formal sector small and medium-size
enterprises. The results show that the growth rate of
employment declines significantly as competition from
informal firms rises. According to the baseline
specification, for each one standard deviation increase in
informal competition, the employment growth rate declines by
1 percentage point. Consistent with the parasite view of
informality, the negative impact on job growth is much
larger when the business environment is less conducive to
operating formally versus informally due to factors such
high corruption, weak rule of law, more burdensome
regulations, and high profit tax rate. Several checks are
provided against endogeneity concerns. |
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