Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129970
Authors: 
Alonso-Ortiz, Jorge
Leal, Julio
Year of Publication: 
2014
Series/Report no.: 
Working Papers, Banco de México 2014-26
Abstract: 
How is the size of the informal sector affected when the distribution of social expenditures across formal and informal workers changes? Given this distribution, how is it affected when the generosity of these transfers changes? We use a search frictions model with informality, (ex post) heterogeneous workers, and conditional taxes and transfers. In the model, formal jobs are "better" than informal jobs, but harder to get. Taxes are proportional to the wage, while transfers are lump sum, implying a cross-subsidy from high-income to low-income workers. As a result, the marginal worker weighs two opposing forces: changes in taxes vs. changes in transfers. We calibrate the model to Mexico and perform counterfactuals. We find that informality is quite inelastic due to frictions, and due to the opposing forces of taxes and transfers.
Subjects: 
informality
elasticity of informality
social expenditures
cross-subsidies
taxes and transfers
search frictions
JEL: 
E2
E26
J46
J6
Document Type: 
Working Paper
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