The effect of trade liberalization on payroll tax evasion and labor informality

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: informal labor markets; trade liberalization; payroll tax evasion (search for similar items in EconPapers)
JEL-codes: F12 F16 H26 O17 (search for similar items in EconPapers)
Date: 2012-05-07
New Economics Papers: this item is included in nep-iue and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://mpra.ub.uni-muenchen.de/44926/1/MPRA_paper_44926.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/44928/1/MPRA_paper_44928.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/45726/1/MPRA_paper_45726.pdf revised version (application/pdf)

Related works:
Working Paper: The impacts of trade liberalization on informal labor markets: an evaluation of the Brazilian case (2012)
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