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Do Public Sector Employment Reductions Promote Informality?

Antonis Adam and Thomas Moutos

No 10614, CESifo Working Paper Series from CESifo

Abstract: Using information from all IMF conditionality programs from 1990 to 2018, we implement a dynamic Augmented Inverse Probability Weighting Regression Adjustment approach to examine the effects of programs, including public sector dismissals, on the size of the shadow economy. The estimated effect five years after the policy intervention indicates an increase in the share of the shadow economy to GDP by about 1.3 percentage points. More importantly, this change involves a sizable reallocation of private economic activity from its formal to its informal part, i.e., the size of the formal private sector relative to the size of the informal sector decreases by seven percentage points. We interpret these findings through the lens of a two-sector model in which there is interdependence between worker incomes and the allocation of product demand across the formal and informal sectors.

Keywords: shadow economy; public sector employment; IMF programs; informality (search for similar items in EconPapers)
JEL-codes: J45 O17 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-dev, nep-iue and nep-lma
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