Epidemics and Informality in Developing Countries

Abstract

Developing countries are facing the Covid-19 epidemic with particular challenges, such as their economic and labor force composition. In this research I will extend the so-called SIR-macro model with demand and supply effects to study how the size of the informal sector impact the ability of these countries to respond to the epidemic. Lockdown policies are useful to control the health crisis but these are less effective in informal markets. As a result, infection and death rates will not decrease as expected, and since informal activities are not counted in the calculation of the GDP, this would exacerbate the size of the recession. Finally, in order to generate similar results to an economy with only formal markets, the economy with informal markets has to implement more severe containment policies.

Keywords: COVID-19, informality, recessions, SIR macro model

JEL Classification: E26, E32, I12, H30