Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-11T15:07:03.884Z Has data issue: false hasContentIssue false
  • English
  • Français

FISCAL ADJUSTMENTS AND THE SHADOW ECONOMY IN AN EMERGING MARKET

Published online by Cambridge University Press:  05 February 2020

Celso J. Costa Junior ,
Alejandro C. Garcia-Cintado  and
Carlos Usabiaga
Celso J. Costa Junior
Affiliation:
State University of Ponta Grossa
Alejandro C. Garcia-Cintado*
Affiliation:
Pablo de Olavide University
Carlos Usabiaga
Affiliation:
Pablo de Olavide University
*
Address correspondence to: Alejandro C. Garcia-Cintado, Pablo de Olavide University. Carretera de Utrera, Km. 1, 41013 Seville, Spain. e-mail: agcintado@upo.es. Phone: +34 954348994. Fax: +34 954349339.
Get access Rights & Permissions [Opens in a new window]

Abstract

We build an open-economy dynamic stochastic general equilibrium (DSGE) model that allows us to: (i) derive a time series for labor informality in Brazil spanning the period 2004–2018, whose evolution is consistent with the behavior of the main series provided by Pesquisa Nacional por Amostra de Domicílios (PNAD); (ii) run dynamic simulations showing that, in the presence of a large informal labor market (around 50% of the total labor force), expenditure-cutting measures lead, at worst, to mild short-run recessions in the formal sector and are likely to foster public debt sustainability. Likewise, adjustments through some kinds of distortionary taxation, mainly the corporate tax, and to a lesser extent, the consumption tax, also seem to improve both public debt dynamics and fiscal collection without a significant cost in terms of output. Thus, in countries with large informal economies experiencing fiscal woes, expenditure-based consolidations, as well as some sorts of tax-based adjustments, should be relied upon.

Keywords

DSGE ModelsShadow EconomyFiscal PolicyEmerging Economies
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1666 - 1700
Copyright
© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We would like to thank, without implicating, two anonymous referees and the Editors of Macroeconomic Dynamics, Luis de Araujo, Ali Bayar, Javier Ferri, Bernardo Guimaraes, Tim Kehoe, Miguel Leon-Ledesma, Alessandro Maravalle, Diego Martinez-Lopez, Daniel Oto-Peralias, Stephen L. Parente, Diego Romero-Ávila, Manuel Toledo, as well as participants at the VI Regional Modelling Workshop, European Commission, October 25–26, 2018, at the XLIII International Conference on Regional Science, November, 15–17, 2017, Seville, at the 17th SAET Conference on Current Trends in Economics, Faro, June 25–30, 2017, at the seminar entitled “Usando a teoria para medir a atividade informal”, FGV-EESP, September 9, 2016, São Paulo, and at the EcoMod2016 International Conference on Economic Modeling, July 6–8, 2016, Lisbon, for the helpful comments made on an earlier version of this paper. We are also grateful to the Research Groups PAIDI SEJ-513 and ECO2017-86780-R for the funding provided. All the remaining errors are our sole responsibility.

References

REFERENCES

Acosta, P., Lartey, E. and Mandelman, F. (2009) Remittances and the Dutch disease. Journal of International Economics 79(1), 102–116.10.1016/j.jinteco.2009.06.007CrossRefGoogle Scholar
Annicchiarico, B. and Cesaroni, C. (2018) Tax reforms and the underground economy: A simulation-based analysis. International Tax and Public Finance 25(2), 458–518.10.1007/s10797-017-9450-7CrossRefGoogle Scholar
Argentiero, A. and Bollino, C. A. (2015) Uncovering unobserved economy: A general equilibrium characterization. Metroeconomica 66(2), 306–338.10.1111/meca.12072CrossRefGoogle Scholar
Barbosa-Filho, F. H. and Veloso, F. (2016) Fatos estilizados da informalidade do trabalho no Brasil. In: Barbosa-Filho, F. H., Ulyssea, G. and Veloso, F. (eds.), Causas e Consequências da Informalidade no Brasil, pp. 3–34. Rio de Janeiro: Elsevier-FGV/IBRE.Google Scholar
Barros, R. P. D. (2015) On the empirical content of the formal-informal labor market segmentation hypothesis. IPEA (Instituto de Pesquisa Econômica Aplicada), Discussion Paper No. 18.Google Scholar
Botelho, F. and Ponczek, V. (2011) Segmentation in the Brazilian labor market. Economic Development and Cultural Change 59(2), 437–463.10.1086/657127CrossRefGoogle Scholar
Buehn, A. and Schneider, F. (2012) Shadow economies around the world: Novel insights, accepted knowledge, and new estimates. International Tax and Public Finance 19(1), 139–171.10.1007/s10797-011-9187-7CrossRefGoogle Scholar
Busato, F. and Chiarini, B. (2004) Market and underground activities in a two-sector dynamic equilibrium model. Economic Theory 23(4), 831–861.10.1007/s00199-003-0400-5CrossRefGoogle Scholar
Cacciamali, M. C. and Fernandes, R. (1993) Distribuição dos trabalhadores e diferenciais de salários entre mercados de trabalho regulamentado e não regulamentado. Pesquisa e Planejamento Econômico 23(1), 135–156.Google Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12(3), 383–398.10.1016/0304-3932(83)90060-0CrossRefGoogle Scholar
Carlstrom, C. T. and Fuerst, T. S. (1995) Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy. Journal of Monetary Economics 36(2), 247–267.10.1016/0304-3932(95)01221-4CrossRefGoogle Scholar
Carneiro, F. and Henley, A. (2001) Modelling formal vs. informal employment and earnings: Micro-econometric evidence for Brazil. University of Wales at Aberystwyth Management & Business Working Papers, No. 2001–15.Google Scholar
Castro, M. R., Gouvea, S. N., Minella, A., Santos, R. C. and Souza-Sobrinho, N. F. (2015) SAMBA: Stochastic analytical model with a Bayesian approach. Brazilian Review of Econometrics 35(2), 103–170.10.12660/bre.v35n22015.57573CrossRefGoogle Scholar
Cavalcanti, M. A. F. H. and Vereda, L. (2011) Propriedades dinâmicas de um modelo DSGE com parametrizaçôes alternativas para o Brasil. IPEA (Instituto de Pesquisa Econômica Aplicada), Texto para Discussão No. 1588.Google Scholar
Chatterjee, S. and Turnovsky, S. J. (2018) Remittances and the informal economy. Journal of Development Economics 133, 66–83.10.1016/j.jdeveco.2018.02.002CrossRefGoogle Scholar
Colombo, E., Onnis, L. and Tirelli, P. (2016) Shadow economies at times of banking crises: Empirics and theory. Journal of Banking and Finance 62, 180–190.10.1016/j.jbankfin.2014.09.017CrossRefGoogle Scholar
Cooley, T. F. and Quadrini, V. (1999) A neoclassical model of the Phillips curve relation. Journal of Monetary Economics 44(2), 165–193.10.1016/S0304-3932(99)00022-7CrossRefGoogle Scholar
Dell’Anno, R. (2018) Inequality, informality, and credit market imperfections. Macroeconomic Dynamics 22(5), 1184–1206.10.1017/S1365100516000663CrossRefGoogle Scholar
Dessy, S. and Pallage, S. (2003) Taxes, inequality and the size of the informal sector. Journal of Development Economics 70(1), 225–233.10.1016/S0304-3878(02)00086-XCrossRefGoogle Scholar
Dickens, W. T. and Lang, K. (1985) A test of dual labor market theory. American Economic Review 75(4), 792–805.Google Scholar
Elgin, C. and Solis-Garcia, M. (2015) Tax enforcement, technology, and the informal sector. Economic Systems 39(1), 97–120.10.1016/j.ecosys.2014.05.007CrossRefGoogle Scholar
Elgin, C. and Uras, B. R. (2013) Public debt, sovereign default risk and shadow economy. Journal of Financial Stability 9(4), 628–640.10.1016/j.jfs.2012.09.002CrossRefGoogle Scholar
Fernandes, R. (1996) Mercado de trabalho não-regulamentado: Participação relativa e diferenciais de salários. Pesquisa e Planejamento Econômico 26(3), 417–442.Google Scholar
Finkelstein Shapiro, A. and Mandelman, F. S. (2016) Remittances, entrepreneurship, and employment dynamics over the business cycle. Journal of International Economics 103(C), 184–199.10.1016/j.jinteco.2016.10.001CrossRefGoogle Scholar
Fuerst, T. S. (1992) Liquidity, loanable funds, and real activity. Journal of Monetary Economics 29(1), 3–24.10.1016/0304-3932(92)90021-SCrossRefGoogle Scholar
Funkhouser, E. (1996) The urban informal sector in Central America: Household survey evidence. World Development 24(11), 1737–1751.10.1016/0305-750X(96)00074-5CrossRefGoogle Scholar
Gallaway, J. H. and Bernasek, A. (2002) Gender and informal sector employment in Indonesia. Journal of Economic Issues 36(2), 313–321.10.1080/00213624.2002.11506473CrossRefGoogle Scholar
Glomm, G., Jung, J. and Tran, C. (2018) Fiscal austerity measures: Spending cuts vs. tax increases. Macroeconomic Dynamics 22(2), 501–540.10.1017/S1365100516000298CrossRefGoogle Scholar
Johnson, S., Kaufmann, D. and Shleifer, A. (1997) The unofficial economy in transition. Brookings Papers on Economic Activity 2, 159–239.10.2307/2534688CrossRefGoogle Scholar
Kudrna, G., Tran, C. and Woodland, A. (2019) Facing demographic challenges: Pension cuts or tax hikes? Macroeconomic Dynamics 23(2), 625–673.10.1017/S1365100516001292CrossRefGoogle Scholar
Leal-Ordóñez, J. C. (2014) Tax collection, the informal sector, and productivity. Review of Economic Dynamics 17(2), 262–286.10.1016/j.red.2013.07.004CrossRefGoogle Scholar
Lehmann, H. and Pignatti, N. (2007) Informal employment relationships and labor market segmentation in transition economies: Evidence from Ukraine. IZA Discussion Papers, No. 3269.Google Scholar
Loayza, N. V. (1996) The economics of the informal sector: A simple model and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy 45(1), 129–162.10.1016/S0167-2231(96)00021-8CrossRefGoogle Scholar
Loayza, N. V. and Rigolini, J. (2011) Informal employment: Safety net or growth engine? World Development 39(9), 1503–1515.10.1016/j.worlddev.2011.02.003CrossRefGoogle Scholar
Maloney, W. F. (1998) Are labor markets in developing countries dualistic? World Bank Policy Research Working Papers, No. 1941.Google Scholar
Maloney, W. F. (1999) Does informality imply segmentation in urban labor markets? Evidence from sectoral transitions in Mexico. World Bank Economic Review 13(2), 275–302.10.1093/wber/13.2.275CrossRefGoogle Scholar
Maloney, W. F. (2004) Informality revisited. World Development 32(7), 1159–1178.10.1016/j.worlddev.2004.01.008CrossRefGoogle Scholar
Marcelli, E. A., Pastor, M. and Joassart, P. M. (1999) Estimating the effects of informal economic activity: Evidence from Los Angeles county. Journal of Economic Issues 33(3), 579–607.10.1080/00213624.1999.11506187CrossRefGoogle Scholar
Marcouiller, D., de Castilla, V. R. and Woodruff, C. (1997) Formal measures of the informal-sector wage gap in Mexico, El Salvador, and Peru. Economic Development and Cultural Change 45(2), 367–392.10.1086/452278CrossRefGoogle Scholar
Menezes-Filho, N. A., Mendes, M. and Almeida, E. S. D. (2004) O diferencial de salários formal-informal no Brasil: Segmentação ou viés de seleção? Revista Brasileira de Economia 58(2), 235–248.10.1590/S0034-71402004000200005CrossRefGoogle Scholar
Mussolini, C. C. (2011) Ensaios em Política Fiscal. São Paulo: Escola de Economia de São Paulo.Google Scholar
OECD (2002) Measuring the Non-Observed Economy. A Handbook. Paris: OECD-IMF-ILO-CIS Stat.Google Scholar
Orsi, R., Raggi, D. and Turino, F. (2014) Size, trend, and policy implications of the underground economy. Review of Economic Dynamics 17(3), 417–436.10.1016/j.red.2013.11.001CrossRefGoogle Scholar
Pappa, E., Sajedi, R. and Vella, E. (2015) Fiscal consolidation with tax evasion and corruption. Journal of International Economics 96(S1), S56–S75.10.1016/j.jinteco.2014.12.004CrossRefGoogle Scholar
Pastore, A. C. (2015) Inflação e Crises. O Papel da Moeda. Rio de Janeiro: Elsevier.Google Scholar
Pero, V. L. (1992) A carteira de trabalho no mercado de trabalho metropolitano brasileiro. Pesquisa e Planejamento Econômico 22(2), 305–342.Google Scholar
Pradhan, M. and Van Soest, A. (1995) Formal and informal sector employment in urban areas of Bolivia. Labour Economics 2(3), 275–297.10.1016/0927-5371(95)80032-SCrossRefGoogle Scholar
Prado, M. (2011) Government policy in the formal and informal sectors. European Economic Review 55(8), 1120–1136.10.1016/j.euroecorev.2011.04.010CrossRefGoogle Scholar
Restrepo-Echavarria, P. (2014) Macroeconomic volatility: The role of the informal economy. European Economic Review 70(C), 454–469.10.1016/j.euroecorev.2014.06.012CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61(1), 163–185.10.1016/S0022-1996(02)00056-9CrossRefGoogle Scholar
Schneider, F., Buehn, A. and Montenegro, C. E. (2010) New estimates for the shadow economies all over the world. International Economic Journal 24(4), 443–461.10.1080/10168737.2010.525974CrossRefGoogle Scholar
Schneider, F. and Enste, D. H. (2013) The Shadow Economy: An International Survey, 2nd ed. Cambridge: Cambridge University Press.10.1017/CBO9781139542289CrossRefGoogle Scholar
Tannuri-Pianto, M. and Pianto, D. (2016) Mercado de trabalho informal no Brasil: Escolha ou segmentação? In: Barbosa-Filho, F. H., Ulyssea, G. and Veloso, F. (eds.), Causas e Consequências da Informalidade no Brasil. Rio de Janeiro: Elsevier-FGV/IBRE.Google Scholar
Turnovsky, S. J. and Basher, Md. A. (2009) Fiscal policy and the structure of production in a two-sector developing economy. Journal of Development Economics 88(2), 205–216.10.1016/j.jdeveco.2008.03.001CrossRefGoogle Scholar
Ulyssea, G. (2006) Informalidade no mercado de trabalho brasileiro: Uma resenha da literatura. Revista de Economia Política 26(4), 596–618.Google Scholar