The impact of inequality on the informal economy in Latin America and Caribbean with a MIMIC model

Marcos Takanohashi (), Marcel Ribeiro () and Friedrich Schneider ()
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Marcos Takanohashi: FGV
Marcel Ribeiro: FGV
Friedrich Schneider: Johannes Kepler University

Empirical Economics, 2025, vol. 69, issue 1, No 6, 211 pages

Abstract: Abstract Informality is a major issue in Latin America and the Caribbean (LAC). The literature estimating its size has been primarily limited to worldwide models applied to the region. This paper proposes a Multiple Indicators Multiple Causes (MIMIC) model using a data set composed of 41 countries in LAC. The model introduces income inequality and total factor productivity in addition to traditional variables. The results indicate that income inequality is a key determinant of IE, both in terms of statistical significance and measurement. Compared to a model using data from 188 countries, some causal variables have an impact ten times greater on the level of informality, highlighting the importance of tailor-made data set selection when modeling IE with MIMIC.

Keywords: Informal economy (IE); MIMIC (multiple indicators; multiple causes); Shadow economy; Underground economy; Non-observed economy; Inequality; Informality; Tax burden; Quality of state institutions; Regulations; Governance; GINI coefficient; TFP; Latin America and the Caribbean (LAC) (search for similar items in EconPapers)
JEL-codes: D78 E26 H26 H32 O17 O54 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02729-w

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