Crossâ€ Subsidies, and the Elasticity of Informality to Social Expenditures: The Case of Mexico's Seguro Popular
Jorge Alonsoâ€ Ortiz and
Review of Income and Wealth, 2018, vol. 64, issue 2, 482-512
How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? How is it affected when the tax rate changes along with the generosity of these transfers? In our search model, taxes are levied on formalâ€ sector workers as a proportion of their wage. Transfers, in contrast, are lumpâ€ sum and are received by both formal and informal workers. This implies that highâ€ wage formal workers subsidize lowâ€ wage formal workers as well as informal workers. We calibrate the model to Mexico and perform counterfactuals. We find that the size of the informal sector is quite inelastic to changes in taxes and transfers. This is due to the presence of search frictions and to the crossâ€ subsidy in our model: for lowâ€ wage formal jobs, a tax increase is roughly offset by an increase in benefits, leaving the unemployed approximately indifferent. Our results are consistent with the empirical evidence on the recent introduction of the â€œSeguro Popularâ€ healthcare program.
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Persistent link: https://EconPapers.repec.org/RePEc:bla:revinw:v:64:y:2018:i:2:p:482-512
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