Informality Over the Life-Cycle
GATE Working Paper WP 1834 – December 2018
40 Pages Posted: 3 Jan 2019
Date Written: December 13, 2018
In developing countries, informality is mainly concentrated on younger and older workers. In this paper, we propose a dual labor market theory that highlights how frictions and taxation in the formal sector as well as educational choices interact to shape the informality rate over the life-cycle. We develop a life-cycle model with search frictions, skill heterogeneities, and endogenous educational choices. We carry out a numerical analysis and show that our model reproduces remarkably well the life-cycle patterns of informality, non-employment and formal employment in Argentina. We analyze several public policies and show that an educational grant reduces both informality and non-employment and may be fully financed by the extra tax revenues generated by the increase in formal employment and wages. Lowering taxes may achieve similar results but is detrimental for the government budget, in the case of Argentina, despite increasing the base on which they are levied.
Keywords: Informality, Search and Matching, Life-Cycle, Public Policy, Laffer Curve
JEL Classification: E26, O17, J46, J64
Suggested Citation: Suggested Citation