Informality Over the Life-Cycle

GATE Working Paper WP 1834 – December 2018

40 Pages Posted: 3 Jan 2019

See all articles by Julien Albertini

Julien Albertini

University of Lyon 2

Anthony Terriau

Groupe d'Analyse et de Theorie Economique (GATE), CNRS, University of Lyon

Date Written: December 13, 2018

Abstract

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

Albertini, Julien and Terriau, Anthony, Informality Over the Life-Cycle (December 13, 2018). GATE Working Paper WP 1834 – December 2018. Available at SSRN: https://ssrn.com/abstract=3302579 or http://dx.doi.org/10.2139/ssrn.3302579

Julien Albertini (Contact Author)

University of Lyon 2 ( email )

Anthony Terriau

Groupe d'Analyse et de Theorie Economique (GATE), CNRS, University of Lyon ( email )

93 Chemin des Mouilles
Ecully, 69130
France

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