Tax policies, informality, and real wage rigidities

Andres Garcia-Suaza, Fernando Jaramillo () and Marlon Salazar ()

No 20744, Documentos de Trabajo from Universidad del Rosario

Abstract: Developing countries have a vast informal sector generally associated with low productivity levels. The response of informal employment to tax policies might depend on labor market rigidities. This paper proposes a theoretical framework consisting of a search and matching model with segmentation in the labor market to understand how tax policies and enforcement interact to determine the size of the formal sector. The analytical results show that decreasing payroll taxes increases formal employment demand, and enforcement expenditure decreases informal employment offers. The model suggests that a tax policy combination leads to a significant impact on informality reduction. Moreover, the magnitude of the effect of tax policies depends on real wage rigidities, i.e., when the economy faces high real wage rigidities, the tax policies have a higher effect on informality reduction

Keywords: Informality; payroll taxes; fiscal policy; enforcement; search frictions; shirking; developing countries. (search for similar items in EconPapers)
JEL-codes: E26 E62 J21 J31 J46 K42 O17 (search for similar items in EconPapers)
Pages: 38
Date: 2023-04-28
New Economics Papers: this item is included in nep-des, nep-dge, nep-iue, nep-lam, nep-law, nep-lma and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Tax policies, informality, and real wage rigidities (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000092:020744

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