Casting a Shadow: Productivity of Formal Firms and Informality

38 Pages Posted: 6 Aug 2019

See all articles by Mohammad Amin

Mohammad Amin

World Bank - Enterprise Analysis Unit

Franziska Ohnsorge

World Bank

Cedric Iltis Finafa Okou

World Bank

Date Written: July 22, 2019

Abstract

Using firm-level survey data for a large cross section of countries, the paper assesses the gap in labor productivity between formal and informal firms in developing countries for which comparable data are available. It also investigates the impact of competition from informal firms on the labor productivity of formal firms. The results show that on average, the labor productivity of informal firms is about one-fourth that of formal firms. Moreover, the labor productivity of formal firms that face competition from informal firms is about 75 percent of the average labor productivity of formal firms that do not experience informal competition. This suggests that competition from the informal sector can erode formal firms' market share and the resources available to boost productivity where formal firms shoulder the additional cost of regulatory compliance. These findings are robust to a range of firm and country characteristics as well as checks for endogeneity concerns.

Keywords: Labor Markets, Employment and Unemployment, Plastics & Rubber Industry, Business Cycles and Stabilization Policies, Textiles, Apparel & Leather Industry, Pulp & Paper Industry, Food & Beverage Industry, Common Carriers Industry, Construction Industry, General Manufacturing, Educational Sciences

Suggested Citation

Amin, Mohammad and Ohnsorge, Franziska and Okou, Cedric Iltis Finafa, Casting a Shadow: Productivity of Formal Firms and Informality (July 22, 2019). World Bank Policy Research Working Paper No. 8945. Available at SSRN: https://ssrn.com/abstract=3430560

Mohammad Amin (Contact Author)

World Bank - Enterprise Analysis Unit ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Cedric Iltis Finafa Okou

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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