Informality over the life-cycle

• Published in: Journal of economic dynamics & control Vol. 105; pp. 182 - 202
• Main Authors: Albertini, Julien, Terriau, Anthony
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-08-2019; Elsevier
• Subjects: Economics and Finance; Humanities and Social Sciences; Informality; Laffer curve; Life-cycle; Public policy; Search and matching; O17; Informality; Life-cycle; E26; Search and matching; J64; Public policy; J46; Laffer curve
• ISSN: 0165-1889; 1879-1743
• DOI: 10.1016/j.jedc.2019.06.007

In developing countries, informality is mainly concentrated among younger and older workers and low-skilled workers. In this study, we propose a dual labor market theory that highlights how frictions and taxation in the formal sector and educational choices interact to shape the informality rate over the life-cycle. We develop a life-cycle model with search frictions, skill heterogeneities, and endogenous educational choices. We carry out a numerical analysis and show that our model reproduces remarkably well the life-cycle patterns of informality, non-employment, and formal employment in Argentina. We analyze several public policies and show that an educational grant reduces both informality and non-employment and may be fully financed by the extra tax revenues generated by the increase in formal employment and wages. Lowering taxes may achieve similar results but is detrimental to the government budget, despite increasing the base on which they are levied.