Facts About Informality

Question 1

What pattern does informality among workers age follow

Answer 1

U-shape.

Large among younger and older workers

Question 2

Informality high or less with women, and schooling

Answer 2

Higher among women

Informality decreases with schooling

Question 3

What pattern do transitions into and out of informality follow?

Answer 3

Young, women, and low skilled have a higher probability of transiting from unemployment and formal jobs into INFORMAL employment

Question 4

Informal employment relationship with the business cycle

Answer 4

Counter cyclical - increases during recessions, decreases during booms (as a proportion of total employment)

Question 5

Formal-informal wage gap?

B) within firm wage gap (so informal and formal workers in same firm)

Answer 5

There is a informal formal firm wage gap

B) no within firm wage gap

Question 6

No within firm wage gap:
What does this suggest? (2)

Answer 6

Self-selection drives wage gap between observably equivalent workers (people don’t mind working under an informal contract)

Conditional on workers skill - they both have similar performance within the firm

Question 7

Informal firms typical characteristics (5)

Answer 7

Smaller
Lower wages
Run by less educated individuals
Hire less educated workers
Earn lower profits

Question 8

Does this support the dualistic view of informality (that formal/informal firms cannot produce the same thing?)

Provide 2 findings

Answer 8

No - Evidence does not support duality!!

• often they often produce similar products
• overlap in productivity distributions

Question 9

Informality and firm size relationship

Answer 9

Negative rel - more employees, less informality (can form union, demand contracts and higher wages etc)

Question 10

So informality falls with firm size

Why does the costs and opportunity cost of operating in the informal sector become higher as firm size increases (3)

Answer 10

• larger informal firms have a hard time remaining undetected by gov. (They do random audits)
• Large firms need to access formal credit lines (loans to expand further, or if want to get insurance etc)
• Need to issue invoices to buyers (impossible if informal)

Question 11

Informal firms and intensive margins

Answer 11

• intensive margin (e.g hours worked) declines as firms grow larger.

Question 12

Why? (2)

Answer 12

• more visible and more likely to be inspected
  (so got to have a lower intensive margin to meet worker wellbeing regulations)
• Costly to inspect small firms , so gov focus on larger firms