Labor Market Policy Core Course: Creating Jobs in a Post- Crisis World. March 28- April 8, 2011 Washington, D.C. -- World Bank HQ- Room I2-250

Transcription

1 Labor Market Policy Core Course: Creating Jobs in a Post- Crisis World March 28- April 8, 2011 Washington, D.C. -- World Bank HQ- Room I2-250 PRESENTER: BILL MALONEY TITLE: LABOR INFORMALITY DATE: MARCH 31 ST 1

2 Labor Informality Bill Maloney Development Economics Research Group 2

3 Informality is a poor country issue, no matter how it is measured. 2 Measures of Informality vs Income per Capita Lack of Pensions (% Labor Force) 1/ Def: Legal/Social Protection - 10,000 20,000 30,000 40,000 Self Employment (% of Labor Force) 2/ Def: Productive - 10,000 20,000 30,000 40, GDP per capita PPP adjusted 2005 GDP per capita PPP adjusted Latin America Advanced Countries Rest of the world Latin America Advanced Countries Rest of the world 3

4 Why do we care? Unprotected workers: issue of welfare, equity and efficiency Productivity: firms too small? Barriers to growth? Indicator of regulatory distortions Low and distorted tax collections and poor provision of public services Weak rule of law and Governance: A problem in our social contract? 4

5 Exit and Exclusion Traditional exclusion view of informality Labor: inferior jobs in a segmented market Firms: denied access to services by high entry costs (de Soto) Exit view: agents analyze costs vs. benefits of becoming formal Labor: informality offers flexibility, avoidance of poorly designed benefits programs, and provides decent work Firms: don t need/want State programs, don t pay for them Larger firms and individuals: Why pay taxes if can avoid? Both exist to varying degrees across countries but have different implications for policy 5

6 The Informal Worker Comparative Advantage and Constraints 6

7 3 margins of informality Margins of Informality Intersectoral Margin (labor) Share of labor force Micro Firms Formal Informal Modern Firms Intersectoral Margin (firms) DeSoto Intrafirm Margin Maloney 2006) Firm Size - workers (θ) 7

8 Intrafirm Margin-not central story Most informal workers found in small firms 75% of Mexican and Argentine in firms of at most 5 workers However, expansion in large firms in Arg, Bra over 1990s The allocation of Informal Workers across firm size % of Informal and Self Employed workers Mexico (Urban Areas) % of Informal and Self Employed workers Argentina (Gran Buenos Aires) to 5 6 to to to Firm Size Firm Size 9

9 Intersectoral (de Soto) Margin (firms) - How many are close to becoming formal? Firm size determined by cost structure (Lucas 1978)- many may not be close to margin MX: Reason for not registering (Woodruff and McKenzie 2006) 75% business is too small ~10%- cost of registration, compliance too high Fajnzylber et al (2006): little dynamism in small firms MX: lowering of registration/compliance costs leads to small and temporary change in registration-.2% of stock of informal. (Kaplan et. al 2006) BR: Fajnzylber et al (2007) small reaction to SIMPLES program. Evidence to date suggests that this is not the critical margin. 10

10 Intersectoral (worker) margin: Competing theories Disadvantaged group of a segmented labor market Formal: Protected sector/high productivity/good jobs Informal : Disguised Unemployment/Low productivity Queuing to get job in the formal sector, worse in downturns. Alternate view here: workers choose among differing job characteristics (Lucas again) Unregulated largely voluntarily microfirm sector. Entrepreneurs weigh pros and cons of formality Firms may have little potential for growth Similar to job-job transitions in US Conditional wage comparisons are faux amis: Need to look at other indicators, in particular, labor flows 11

11 Two Distinct Types of Informal Worker Distribution of informal workers in Latin America % employed workers % contributing to social security system % Not Contributing to Social Security System Informal Salaried Informal independent Chile 2003 Uruguay 2004 Brazil 2003 Argentina 2005 El Salvador 2003 Venezuela 2003 Mexico 2002 Dom. Republic 2006 Guatemala 2002 Colombia 2006 Nicaragua 2001 Ecuador 1998 Bolivia 2005 Peru

12 Role of Each Changes across Life-Cycle Informal Salaried port of entry for youth Mexico: Employment as share of age cohort accumulate experience for Formal Salaried or independent work Most in micro firms Self Employment prevalent among prime or older have capital and skills to open a business Cunningham (2007) Self-Employed Form Informal 13

13 Microfirm Dynamics: Similar to mainstream firms Firm Entry, Exit, Participation by Age Percent MEXICO Mexico SE Rate Exit Rate Entry Rate Age Age Entry Rate Exit Rate Self-employment Rate Percent UNITED United States STATES Exit Rate SE Rate Entry Rate Age Age Entry Rate Exit Rate Self-employment Rate 14

14 Workers tell us of both exit and exclusion Most (~2/3) of independent workers are voluntary not queuing for formal jobs value flexibility, esp. women opting out of Social Protection Most Informal Salaried are involuntary would prefer to be FS or SE Exceptions Dominican Republic, Mexico youth: difficulty entering workforce odds ratio Self-rated Poverty Relative to Formal Workers Argentina Independent Source: (Arias 2007) Informal Salaried Dominican Republic 15

15 Labor Dynamics- The New Frontier 16

16 Mainstream debate on Gross Worker Flows across the cycle Implications for role of informality Nature of the adjustment process Blanchard and Diamond (1990) Increase in unemployment was due to the increase in the number of people entering the unemployment pool. Davis and Haltiwanger (1990, 1992) highlight the importance of job destruction in recessions Stylized fact drives modern models of search such as Mortensen Pissarides (1994). Shimer (2005) differs: Acyclical separation rates; Procyclical job finding rate 17

17 Data: Rotating Panels Mexico , ENEU (Urban Employment Survey) 16 major cities in Mexico Brazil: , PME (Monthly Employment survey) 5 large metropolitan areas Permit following workers across: Formal, Salaried, Informal Salaried and Informal Self employed sectors Unemployment and inactivity Following Geweke (1986) map discrete transitions probabilities to continuous time model. 18

18 Worker transitions often suggest voluntary entry Formal to Self-Employment Mexico Formal Salaried to Self Employment Self Employment to Formal Salaried Self-Employed to Formal 1987q1 1991q1 1995q1 1999q1 2003q1 Formal to Self-Employment Source: Bosch and Maloney (2008) Self-Employed to Formal 19

19 And perhaps exclusion after reforms in Brazil Formal to Self-Employment Brasil Constitutional and Commercial Reforms Formal to SE SE to Formal 1983m1 1988m1 1993m1 1998m1 2003m1 time Self-Employment to Formal Formal to Self-Employment Bosch, Goñi, Maloney (2007) Self-Employment to Formal 20

20 The Role of Informality in the Adjustment Process Modern literature focuses on dynamics Stock of unemployment, informality a function of job finding and separation rates US literature- u * t = q s t s t q + q t f Volatility of job finding rate across cycle higher than of separation rate. So movement in unemployment due to less hiring, rather than more firing (Shimer) 21

21 Job separations: IS most volatile Mexico Brazil IS SE FS 1987q1 1991q1 1995q1 1999q IS SE FS 1983q1 1988q1 1993q1 1998q S-U F-U I-U S-U F-U I-U Source: Bosch and Maloney (2008) Formal job separations similar to the US. (Countercyclical, low volatility) Job separation in the informal salaried sector is much higher than in the formal sector, and jump more in downturns. In MX: U driven by IS separations! 22

22 Job Finding Rates: FS most volatile Mexico Brazil IS FS SE 1987q1 1991q1 1995q1 1999q1 2003q1 U-S U-I U-F IS FS SE 1983q1 1988q1 1993q1 1998q1 2003q1 U-S U-I U-F Source: Bosch and Maloney (2008) Job Finding in the formal sector is high volatility and highly pro-cyclical similar to the US. Job finding rates in the Informal sectors are reasonably constant. 23

23 Updated view of cyclical adjustments of LDC labor markets Volatile Formal JF + Constant Informal JF means informal often expands in downturns. But, why do JF patterns differ across sectors? Exactly analogous to US debate. Shimer (2005):standard search models cannot explain the magnitude of the fluctuations in job finding rate. Efforts to fix models Shimer: extreme wage rigidity? Mortensen and Nagypal (2005):maybe not-information assymetries etc. 24

24 Why is informality sometimes Procyclical Mexico Relative earnings Real exchange rate Formal / SE Procyclical/Integrated Unconditioned Earnings F/SE Real exchange rate Formal/SE Countercyclical/Segmented 25

25 Why is informality sometimes Procyclical 1.6 Colombia Relative earnings Real exchange rate Formal / SE Unconditioned Earnings F/SE Real exchange rate Formal/SE Procyclical/Integrated Countercyclical/Segmented 26

26 Implications Shows net voluntary entry Modeling (Fiess, Fugazza, Maloney (2007) Depend on positive shocks To Formal/Tradable To Informal/Nontradable FS rigidities less binding in booms Increase in Informality in early 1990s Boom in nontradables: REER appreciation due to boom in capital inflows: opening of Capital account, Exchange Rate Based Stabilization, improved expectations due to reforms 27

27 What drives longer term behavior? 28

28 Why does it decrease with development? 2 Measures of Informality vs Income per Capita Lack of Pensions (% Labor Force) 1/ Def: Legal/Social Protection - 10,000 20,000 30,000 40,000 Self Employment (% of Labor Force) 2/ Def: Productive - 10,000 20,000 30,000 40, GDP per capita PPP adjusted 2005 GDP per capita PPP adjusted Latin America Advanced Countries Rest of the world Latin America Advanced Countries Rest of the world 29

29 But nature of regulation matters too Bad quality services and protections- why bother being formal But regulation matters too Loayza et al (2006) poor gov t and heavy regulation increase size 30

30 Brazil s increase? Constitutional change or trade reforms? Y = α + α + TRADE β + D* CC β + u jt j t jt TRADE j D. CC jt Dynamic Panel: 18 Industries, Yearly Trade Liberalization: Import Penetration: Muendler (2002) Real effective trade protection rates: Kume et al. (2003) Constitutional Changes: Firing Costs: average tenure (in years) of workers fired (average , source: PME) Overtime: proportion of workers working more than 44 hours (average , source: PME) Union density: % of unionized workers (average 1986 and 1988, source: PNAD) 31

31 Constitutional change or trade reforms? Regression analysis Variable Sector Size Industry Differentials Creation Destruction Dependent (-1) 0.64 *** 0.46 *** Dependent (-2) 0.17 *** 0.18 *** 0.29 *** Effective Tariff * Import Penetration ** *** *** Tenure 0.44 *** 0.02 * 0.24 *** Tenure (-1) *** *** Overtime 3.21 *** 0.23 *** *** Overtime (-1) *** *** 0.65 *** *** Union *** *** Union (-1) 3.07 ** * 0.51 *** *** C *** 1.53 *** 0.49 *** *** R2 (Weighted) R2 (Unweighted) Durbin Watson Included observations Cross-section included Total pool observations

32 Actual and predicted size of the formal sector in Brazil Actual No trade No Constitution 33

33 Policies to Reduce Informality Reduce opportunity cost of informality: raise productivity in the formal sector improved Investment Climate higher human capital accumulation Remove segmenting distortions in labor markets where applicable Tilt the benefit/cost ratio of firms and workers to opt for formality: removing distortionary incentives in Social Protection Systems, reducing cost of doing business for all firms improving services associated with formality especially for SME s, Improve quality and fairness of institutions and policies and even handed enforcement: move social norms towards a culture of compliance. A potential virtuous circle 34