Self-Employment in Developing Countries: A Search-Equilibrium Approach
Review of Economic Dynamics, 2020, vol. 35, 1-34
This paper develops and estimates a life-cycle on-the-job search model with self-employment that captures labour market stylized facts typical of middle-income developing economies. Workers flow across unemployment, self-employment, formal and informal wage employment. Individuals differ across and within employment sectors in terms of earnings, self-employment ability and transition rates. Counterfactual analysis shows that a flat reduction in payroll taxation increases the share of formal sector workers mainly due to a drop in self-employment. A proportional reduction in payroll taxes improves total welfare by increasing formal sector wages and profits, and allowing for a better allocation of high education workers. Converting to a progressive payroll tax system, equivalent to a flat reduction, is ineffective in reducing informality and leads to a decline in total welfare. (Copyright: Elsevier)
Keywords: Self-employment; Informal sector; On-the-job search; Payroll taxation (search for similar items in EconPapers)
JEL-codes: J23 J64 J46 J48 (search for similar items in EconPapers)
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Working Paper: Online Appendix to "Self-Employment in Developing Countries: A Search-Equilibrium Approach" (2019)
Working Paper: Self Employment in Developing Countries: a Search-Equilibrium Approach (2013)
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