2.4 Model’s Implications for Informal Employment Shares

FIGURE 2.4 Model’s Implications for Informal Employment Shares

Source: world bank calculations; ilOSTAT database, international labour Organization, geneva, http://www.ilo .org/ilostat/. Note: ilO = international labour Organization.

employment share in a stationary equilibrium with each country’s pair of distortions alongside the level of economic development of the country. Panel b assesses the model’s predictive power plotting the model’s implied informal employment share against the informal employment share in industrial sectors from the International Labour Organization (ILO). In this case, data availability narrows the intersection of countries to eight.

As we expected, figure 2.4 shows a strong negative relationship between informal employment and economic development. This finding is expected in light of the lower prevalence of both type of distortions in advanced economies. Quantitatively, the model is capable of generating large informal sectors. In the case of India, the informal employment share amounts to 55 percent, about three-quarters of the overall informal employment share documented by the ILO (77 percent).

Figure 2.4, panel a shows that the model offers a good fit with the data. Although the model is simple and applies a common calibration strategy around the world, particularly with respect to the calibration of firm dynamics in the informal sector, the predicted informal employment shares line up quite closely to the data. In India, the model falls short of generating the observed degree of informality; in Chile, the model’s prediction is about twice as high.