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Informality: Causes and Consequences for Development

Ulyssea, G; (2020) Informality: Causes and Consequences for Development. Annual Review of Economics , 12 (2020) pp. 525-546. 10.1146/annurev-economics-082119-121914. Green open access

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Abstract

This article reviews the economic literature on informality, its causes, and its consequences for development. It covers a comprehensive body of research that ranges from well-identified experimental studies to equilibrium macro models, and which more recently includes structural models that integrate both micro and macro effects. The results available in the literature indicate that lowering the costs of formality is not an effective policy to reduce informality but may generate positive aggregate effects, such as higher output and total factor productivity (TFP). The most effective formalization policy is to increase enforcement on the extensive margin but not on the intensive margin of informality. The former generates substantial gains in aggregate TFP and output, without necessarily increasing unemployment. However, the overall welfare impacts are likely to depend on the transitional dynamics between steady states, which remains an open area for future research.

Type: Article
Title: Informality: Causes and Consequences for Development
Open access status: An open access version is available from UCL Discovery
DOI: 10.1146/annurev-economics-082119-121914
Publisher version: https://doi.org/10.1146/annurev-economics-082119-1...
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: informality, development, firms, workers, JEL O17, JEL E24, JEL E26, JEL J46, JEL O11, JEL O12
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10131609
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