C H A P T ER 4
T H E L O NG S HA D O W O F I N F O R MA L I T Y
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TABLE 4D.8 Regression: Changes in informality and improvement in income inequality Gini coefficient Output informality
Lagged inequality Change in informality Lagged informality Squared lagged informality GDP growth
Shared prosperity
Employment informality
Output informality
Employment informality
World
EMDEs
World EMDEs
World
EMDEs
World
EMDEs
-0.90*
-0.84*
-0.86*
-0.80*
-0.90*
-0.85*
-0.84*
-0.77*
(0.06)
(0.07)
(0.09)
(0.12)
(0.06)
(0.07)
(0.09)
(0.12)
-0.18
-0.22
0.02
0.006
0.10
0.12
-0.006
-0.01
(0.17)
(0.18)
(0.07)
(0.08)
(0.07)
(0.07)
(0.03)
(0.04)
-0.28
-0.36
0.29
0.28
0.16
0.21
-0.12
-0.14
(0.41)
(0.46)
(0.18)
(0.13)
0.006
0.007
(0.004)
(0.005)
(0.29)
(0.20)
(0.22)
(0.08)
-0.004* -0.004
-0.003
-0.003
0.002*
0.002
(0.002)
(003)
(0.002)
(0.002)
(0.001)
(0.001)
0.012
0.04
0.01
0.02
(0.02)
(0.03)
R2
0.70
0.72
0.65
Observations
366
262
266
Number of countries
117
85
92
-0.007
-0.009
-0.003
-0.02
(0.014)
(0.014)
(0.014)
(0.023)
0.70
0.68
0.70
0.65
0.71
164
366
262
366
164
60
117
85
117
60
(0.030) (0.05)
Source: World Bank. Note: “Shared prosperity” refers to the income share of the bottom 40 percent of population. The sample of country-year observations starts with the first available observation for each country and all consecutive observations with at least five-year minimum window between them. Sample excludes fragile and conflict-affected states. “Employment informality” is self-employment in percent of total employment and “output informality” is proxied by DGE-based estimates on informal output in percent of official GDP. Dependent variables are two measures of inequality: the change in Gini coefficient and shared prosperity. “GDP growth” denotes cumulative change in GDP per capita during the time window between observations. “Change in informality” denotes change in output (employment) informality during the time window between observations in percent of official GDP (in percent of official employment). “Lagged informality” denotes informality levels at t-1. Control variables include a constant, country and time fixed effects, and squared lagged informality to control for a possible non-linear relationship between informality and inequality. A positive coefficient on change in informality indicates that formalization reduces shared prosperity (the income share of the bottom 40 percent of population). DGE = dynamic general equilibrium model; EMDEs = emerging market and developing economies. Robust standard errors in parentheses; *p<0.05, ** p<0.1.
