Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles

Ceyhun Elgin, Ayhan Kose, Franziska Ohnsorge and Shu Yu

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: We study the degree of synchronization between formal- and informal-economy business cycles. Using a comprehensive database of informal activity that covers a wide range of informality measures from almost 160 countries over the 1990-2018 period, we report two major results. First, fluctuations in informal-sector output are strongly positively correlated with those in formal-sector output. In contrast, fluctuations in informal employment are largely uncorrelated with those in formal-sector output. Second, movements in the formal economy tend to spillover to the informal economy. Using a novel set of instrumental variables, we show that fluctuations in formal-sector output “cause” movements in informal-sector output.

Keywords: Informal economy; self-employment; business cycle. (search for similar items in EconPapers)
JEL-codes: E26 E32 J46 O17 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2021-09
New Economics Papers: this item is included in nep-dev, nep-isf, nep-iue, nep-lma and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles (2021)
Working Paper: Growing apart or moving together? Synchronization of informal and formal economy cycles (2021)
Working Paper: Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles (2021)
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