Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles

Elgin, Ceyhun and Kose, M. Ayhan and Ohnsorge, Franziska and Yu, Shu (2021): Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles.

Abstract

We study the degree of synchronization between formal- and informal-economy business cycles. Using a comprehensive database of informal activity that covers a wide range of informality measures from almost 160 countries over the 1990-2018 period, we report two major results. First, fluctuations in informal-sector output are strongly positively correlated with those in formal-sector output. In contrast, fluctuations in informal employment are largely uncorrelated with those in formal-sector output. Second, movements in the formal economy tend to spillover to the informal economy. Using a novel set of instrumental variables, we show that fluctuations in formal-sector output “cause” movements in informal-sector output.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informal economy, self-employment, business cycle.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E26 - Informal Economy ; Underground Economy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J46 - Informal Labor Markets; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements

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