Informality: Causes and Consequences for Development

Posted: 14 Aug 2020

See all articles by Gabriel Ulyssea

Gabriel Ulyssea

University of Oxford - Department of Economics

Date Written: August 2020

Abstract

This article reviews the economic literature on informality, its causes, and its consequences for development. It covers a comprehensive body of research that ranges from well-identified experimental studies to equilibrium macro models, and which more recently includes structural models that integrate both micro and macro effects. The results available in the literature indicate that lowering the costs of formality is not an effective policy to reduce informality but may generate positive aggregate effects, such as higher output and total factor productivity (TFP). The most effective formalization policy is to increase enforcement on the extensive margin but not on the intensive margin of informality. The former generates substantial gains in aggregate TFP and output, without necessarily increasing unemployment. However, the overall welfare impacts are likely to depend on the transitional dynamics between steady states, which remains an open area for future research.

Suggested Citation

Ulyssea, Gabriel, Informality: Causes and Consequences for Development (August 2020). Annual Review of Economics, Vol. 12, pp. 525-546, 2020, Available at SSRN: https://ssrn.com/abstract=3669624 or http://dx.doi.org/10.1146/annurev-economics-082119-121914

Gabriel Ulyssea (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

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