Three Empirical Essays on Informality

Abstract

Informality is a very complex subject, with the informal workers we see on the streets as only the surface of larger and more complicated issues. The word "informality," when applied to labour, has negative associations. However, it is necessary to identify the economic agents that make up this sector. In this way, studying informality from different perspectives is one of the most important objectives of this thesis. The thesis focuses its analysis on informal labour and economic units, placing the informality of firms at the centre of the study in two chapters. In this way, two main aspects of informality are studied here: labour informality and business informality. Labour informality is analysed in a macroeconomic context and its relationship with investments. Firm informality is analysed from a micro-firm perspective, which has been largely ignored in the literature, with the measurement of micro-firm informality on a per-state basis within a developing country, Mexico, as another objective. A further objective is to ascertain whether there are differences in efficiency between formal and informal micro-firms. The particular objectives and results are as follows: Chapter 2 examines how informal labor markets affect the flows of FDI, and also whether this effect is similar in developed and developing countries. It highlights for the period of study (1996-2009), and the use of panel econometric models in this kind of researches. The sample is made up 65 countries. In addition, this paper uses a dynamic model as an extension of the analysis to establish whether such an effect exists and what its indicators and significance may be. While the results shows that informal labor markets are significant and do positively affect the flow of FDI, these effects are felt up to a certain level of informality, above which the effect becomes negative. The results are similar for developed and developing countries and are robust to several checks. Chapter 3 analyzes the determinants of micro-firms informality in Mexican states inasmuch as the research for micro firms in a developing country has been less noticeable. In this paper, Mexico is taken as case of study by its high level of micro firm informality and the heterogeneity among Mexican states, but also due to data availability. Panel econometric models are estimated for a sample of 32 states over the period 2008-2012. In addition, this paper uses different definitions of informality to check the robustness of the results. The obtained empirical evidence allows us to conclude that, although, economic factors are the main causes of informality variables such as corruption and education have important role to play. Chapter 4 separates formal and informal micro firms in order to test whether there are efficiency differences between them, and to explain these differences. One of the novelties of the study is the use of the Oaxaca-Blinder decomposition method, which enables an analysis of the differences between both groups of firms after controlling for their different allocation of factors. The empirical evidence suggests that output differences can be explained by endowment characteristics, while efficiency differences are explained by endowment returns. The main variables to explain the gap between the groups are the owner’s level of education, the firm’s age, the owner’s motivations, and financing as well.