The Dynamics of Informal Employment

30 Pages Posted: 14 Jul 2000

See all articles by Jane E. Ihrig

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Karine S. Moe

Macalester College - Department of Economics

Date Written: April 2000

Abstract

The informal sector, which produces legal goods but does not comply with government regulations, is a functioning part of all economies, with a proportion of the labor force ranging from 17 percent in OECD countries to 60 percent in developing countries. Using a dynamic model that includes an informal sector, this paper illustrates the natural dynamics of the sector, describes how tax policy affects its size, and quantifies the costs of having it. Simulations yield movements in informal employment and output consistent with empirical observations. We find that the U.S. informal sector accounts for about 5 percent of U.S.labor hours and produces about 3 percent of U.S. GDP in steady state. Strategies for reducing the size of the sector are discussed. We find, however, that the distortion from this sector in terms of lifetime loss in an economy's capital stock, is minimal--supporting those who want to keep the informal sector as a functioning part of society.

Keywords: Enforcement, Taxation, Informal Sector, Economic Development

JEL Classification: H22

Suggested Citation

Ihrig, Jane E. and Moe, Karine S., The Dynamics of Informal Employment (April 2000). International Finance Working Paper No. 664. Available at SSRN: https://ssrn.com/abstract=231954 or http://dx.doi.org/10.2139/ssrn.231954

Jane E. Ihrig (Contact Author)

Federal Reserve Board - International Financial Transactions ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Karine S. Moe

Macalester College - Department of Economics ( email )

1600 Grand Ave.
Saint Paul, MN 55105
United States

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