Paz, Lourenco (2012): The effect of trade liberalization on payroll tax evasion and labor informality.
Download (853kB) | Preview
Several developing countries that underwent trade liberalization experienced changes in the share of informal workers in manufacturing industries. This phenomenon deserves careful examination because informal jobs are not only generally viewed as low-quality and low-paying jobs, they also account for more than 30% of the workforce in some countries. In this paper, I develop a theoretical model of the impacts of trade liberalization on labor markets in which domestic and foreign import tariffs affect firms’ payroll tax compliance decisions, which in turn determine the types of jobs (i.e., formal or informal) created. The model is able to replicate several stylized facts such as some small firms hiring formal and informal workers and large firms hiring only formal workers. Moreover, it predicts that a decrease in domestic import tariffs decreases both the share of informal workers and the average formal wage, whereas a decrease in foreign (i.e., trading partner) import tariffs decreases the informality share but increases the average formal wage. The effect on the average informal wage is ambiguous.
|Item Type:||MPRA Paper|
|Original Title:||The effect of trade liberalization on payroll tax evasion and labor informality|
|Keywords:||informal labor markets; trade liberalization; payroll tax evasion|
|Subjects:||F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions
O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements
F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance
|Depositing User:||Lourenco Paz|
|Date Deposited:||19. Jun 2012 01:21|
|Last Modified:||07. Sep 2015 13:25|
Abowd, J. M., Kramarz, F. and Margolis, D. N. (1999). High Wage Workers and High Wage Firms. Econometrica, 67, 251–333.
Acosta, P. And G. Montes-Rojas (2010). Informal Jobs and Trade Liberalization in Argentina. Mimeo.
Alemán-Castilla, B. (2006). "The Effect of Trade Liberalization on Informality and Wages: Evidence from Mexico". CEP Discussion Paper No. 763.
Amiti, M. and D. Davis (2011). Trade, Firms, and Wages: Theory and Evidence. Review of Economic Studies, forthcoming.
Boisvert, H. and R. Bernard and A. Queiróz (2001). Benchmarking da função finanças: uma análise comparativa do custeio da folha de pagamento. Mimeo.
Broda, C. and N. Limão and D. Weinstein (2008). Optimal Tariffs and Market Power: The Evidence. American Economic Review, 98(5), p.2032-2065.
Davies, R. and L. Paz (2011). Tariffs versus VAT in the presence of heterogeneous firms and an informal sector. International Tax and Public Finance, 18, 533–554.
Davis, D. and J. Harrigan (2011). Good Jobs, Bad Jobs, and Trade Liberalization. Journal of International Economics, 84, p. 26-36.
Dasgupta, P. and D. Ray (1986). Inequality as a Determinant of Malnutrition and unemployment: theory. Economic journal, 96, p.1011-1034.
Demidova, S. and A. Rodriguez-Clare (2011). The simple analytics of the Melitz model in a small open economy. NBER Working Paper 17521.
Dixit, A. and J. Stiglitz (1977) Monopolistic competition and optimum product diversity. American Economic Review, 67(3), p. 297-308.
Ellery, R. G. and V. Gomes (2007). Exports, Productivity and Firms Size in Brazil. Revista Brasileira de Economia, 61(1), p. 33-48.
Evans, C. (2003). Studying the studies: an overview of recent research into taxation operating costs. Journal of Tax Research, 1, p. 64-92.
Goldberg, P. and N. Pavcnik (2003). The Response of the Informal Sector to Trade Liberalization, Journal of Development Economics, 72, December, pp. 463-496.
Goldberg, P. and N. Pavcnik (2005). Trade, Wages, and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms. Journal of International Economics, 66(1), p. 75-105.
Hanson, G. and A. Harrison (1999). Who gains from trade reform? Some remaining puzzles. Journal of Development Economics, 59, p. 125-154.
Helpman, E., M. Melitz, and S. Yaple (2004). Export versus FDI with heterogeneous firms. American Economic Review, 94, pp. 300-316.
Helpman, E. and O. Itskhoki. (2010). Labor Market Rigidities, Trade and Unemployment. Review of Economic Studies, 77 (3), p. 1100-1137.
Helpman, E., O. Itkhoski, and S. Redding (2008). Wages, Unemployment and Inequality with Heterogeneous Firms and Workers. NBER Working Paper 14122.
Hummels, D. (2001). Toward a Geography of Trade Costs. Purdue University, Mimeo.
ILO (2002). Decent work and informal economy. Report VI. International Labour Conference, 90th Session. Geneva: International Labour Office.
Kreickemeier, U. and Ehher, H. (2009). Firm Heterogeneity and the Labor Market Effects of Trade Liberalization. International Economic Review, 50, p. 187-216.
Melitz, M. (2003). The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity. Econometrica 71 (6), p. 1695-1725.
Munk, K. (2008). Tax-tariff reform with costs of tax administration. International Tax and Public Finance, 15, p. 647-667.
Neri, M. (2002). Decent Work and the Informal Sector in Brazil. Ensaios Economicos EPGE n. 461.
Pavcnik, N. and A. Blom and P. Goldberg and N. Schady (2004). Trade Liberalization and Industry Wage Structure: Evidence from Brazil. World Bank Economic Review, 18(3), p. 319-344.
Paz, L. (2012). The Impacts of Trade Liberalization on Informal Labor Markets: An Evaluation of the Brazilian Case. MPRA Working paper n. 38858.
Perry, G., W. Maloney, O. Arias, P. Fajnzylber, A. Mason, and J. Saavedra-Chanduvi (2007). Informality: Exit and Exclusion. World Bank Latin American and Caribbean Studies. Washington D.C.:The World Bank.
Portes, A., M. Castells and L. Benton (1989). World Underneath: The Origins, Dynamics and Effects of the Informal Economy. The Informal Economy: Studies in Advanced and Less Developed Countries. Eds. A. Portes, M. Castells, and L. Benton. John Hopkins, Baltimore.
Pratap, S. and E. Quintin (2006). Are labor markets segmented in developing countries? A semiparametric approach. European Economic Review, 50, pp.1817-1841.
Ray, D. (1998). Development Economics. Princeton University Press.
Roberts, B. (1989). Employment Structure, Life Cycle, and Life Changes: Formal and Informal Sectors in Guadalajara" in The Informal Economy: Studies in Advanced and Less Developed Countries, ed. by A. Portes, M. Castells, and L. A. Breton. Baltimore & London: The John Hopkins University Press.
Romalis, J. (2007). NAFTA'S and CUSFTA's Impact on International Trade. Review of Economics and Statistics, 89(3), 416-435.
Schmidt, C. and K. Zimmermann (1991). Work Characteristics, Firm Size and Wages. Review of Economics and Statistics, 73(4), p. 705-710.
Schneider, F. (2012). Size and Development of the Shadow Economy of 31 European and 5 other OECD Countries from 2003 to 2012: Some New Facts. Mimeo, Johannes Kepler Universitat.
Schneider, F. and D. Enste (2000). Shadow Economies: Size, Causes, and Consequences. Journal of Economic Literature, 38, pp. 77-114.
Shapiro, C. and J. Stiglitz (1984). Equilibrium Unemployment as a Worker Discipline Device. American Economic Review, 74(3), p. 433-444.
Available Versions of this Item
The effect of trade liberalization on payroll tax evasion and labor informality. (deposited 19. Jun 2012 01:21)
- The Impacts of Trade Liberalization on Informal Labor Markets.�. (deposited 10. Mar 2013 17:04)
- The Impacts of Trade Liberalization on Informal Labor Markets: A Theoretical and Empirical Evaluation of the Brazilian Case. (deposited 10. Mar 2013 16:58)