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The Costs and Benefits of Informality

Batini, N, Levine, P and Lotti, E The Costs and Benefits of Informality .

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Abstract

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 informalization: (1) long-term costs 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 improvement.

Item Type: Other
Authors :
NameEmailORCID
Batini, NUNSPECIFIEDUNSPECIFIED
Levine, Pp.levine@surrey.ac.ukUNSPECIFIED
Lotti, EUNSPECIFIEDUNSPECIFIED
Uncontrolled Keywords : J65, E24, E26, E32, Informal economy, labour market, tax policy, interest rate rules
Depositing User : Symplectic Elements
Date Deposited : 16 May 2017 15:14
Last Modified : 17 May 2017 14:33
URI: http://epubs.surrey.ac.uk/id/eprint/818176

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