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Measuring disincentives to formal work

Author

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  • Michael Weber

    (World Bank, USA)

Abstract

Evidence from transition economies shows that formal work may not pay, particularly for low-wage earners. Synthetic measurements of work disincentives, such as the formalization tax rate or the marginal effective tax rate, confirm a significant positive correlation between these measurements and the probability of informal work. These measures are especially informative for impacts at lower wage levels, where informality is highest. Policymakers who want to increase formal work can use these measurements to determine optimal labor taxation rates for low-wage earners and reform benefit design.

Suggested Citation

  • Michael Weber, 2015. "Measuring disincentives to formal work," IZA World of Labor, Institute of Labor Economics (IZA), pages 213-213, December.
    • Handle: RePEc:iza:izawol:journl:y:2015:n:213
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    References listed on IDEAS

    as
    1. Immervoll, Herwig & Pearson, Mark, 2009. "A Good Time for Making Work Pay? Taking Stock of In-Work Benefits and Related Measures across the OECD," IZA Policy Papers 3, Institute of Labor Economics (IZA).
    2. Frolich, Markus & Kaplan, David & Pages, Carmen & Rigolini, Jamele & Robalino, David (ed.), 2014. "Social Insurance, Informality, and Labor Markets: How to Protect Workers While Creating Good Jobs," OUP Catalogue, Oxford University Press, number 9780199685233.
    3. Koettl, Johannes & Weber, Michael, 2012. "Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New EU Member States," IZA Discussion Papers 6313, Institute of Labor Economics (IZA).
    4. Hazans, Mihails, 2011. "Informal Workers across Europe: Evidence from 30 Countries," IZA Discussion Papers 5871, Institute of Labor Economics (IZA).
    5. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Xavier Jara & David Rodríguez, 2019. "Financial disincentives to formal work: Evidence from Ecuador and Colombia," WIDER Working Paper Series wp-2019-14, World Institute for Development Economic Research (UNU-WIDER).
    2. H. Xavier Jara & María Cecilia Deza Delgado & Nicolás Oliva & Javier Torres, 2023. "Financial disincentives to formal employment and tax-benefit systems in Latin America," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(1), pages 69-113, February.

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    More about this item

    Keywords

    informal employment; synthetic measurements; tax wedge; tax evasion; formalization tax rate; marginal effective tax rate;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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