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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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 |
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okr-10986-350292022-09-20T00:10:48Z Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data Amin, Mohammad INFORMALITY INFORMAL SECTOR COMPETITION FORMAL EMPLOYMENT LABOR MARKET COMPETITION POLICY SMALL AND MEDIUM SIZE ENTERPRISE PARASITIC INFORMALITY REGULATORY FRAMEWORK BUSINESS ENVIRONMENT 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. 2021-01-21T15:56:10Z 2021-01-21T15:56:10Z 2021-01 Working Paper 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 English Policy Research Working Paper;No. 9515 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English |
| topic |
INFORMALITY INFORMAL SECTOR COMPETITION FORMAL EMPLOYMENT LABOR MARKET COMPETITION POLICY SMALL AND MEDIUM SIZE ENTERPRISE PARASITIC INFORMALITY REGULATORY FRAMEWORK BUSINESS ENVIRONMENT |
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INFORMALITY INFORMAL SECTOR COMPETITION FORMAL EMPLOYMENT LABOR MARKET COMPETITION POLICY SMALL AND MEDIUM SIZE ENTERPRISE PARASITIC INFORMALITY REGULATORY FRAMEWORK BUSINESS ENVIRONMENT Amin, Mohammad Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data |
| relation |
Policy Research Working Paper;No. 9515 |
| description |
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. |
| format |
Working Paper |
| author |
Amin, Mohammad |
| author_facet |
Amin, Mohammad |
| author_sort |
Amin, Mohammad |
| title |
Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data |
| title_short |
Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data |
| title_full |
Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data |
| title_fullStr |
Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data |
| title_full_unstemmed |
Does Competition from Informal Firms Hurt Job Creation by Formal Firms? Evidence Using Firm-Level Survey Data |
| title_sort |
does competition from informal firms hurt job creation by formal firms? evidence using firm-level survey data |
| publisher |
World Bank, Washington, DC |
| publishDate |
2021 |
| url |
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 |
| _version_ |
1764482171985199104 |