Working Paper: CEPR ID: DP16498
Authors: Ceyhun Elgin; M. Ayhan Kose; Franziska Ohnsorge; Shu Yu
Abstract: We study the degree of synchronization between formal- and informal-economy business cycles. Using a comprehensive database of informal activity that covers a wide range of informality measures from almost 160 countries over the 1990-2018 period, we report two major results. First, fluctuations in informal-sector output are strongly positively correlated with those in formal-sector output. In contrast, fluctuations in informal employment are largely uncorrelated with those in formal-sector output. Second, movements in the formal economy tend to spillover to the informal economy. Using a novel set of instrumental variables, we show that fluctuations in formal-sector output “cause” movements in informal-sector output.
Keywords: informal economy; self-employment; business cycle
JEL Codes: E26; E32; J46; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fluctuations in informal economy output (E26) | Fluctuations in formal economy output (E32) |
| Fluctuations in formal economy output (E32) | Fluctuations in informal employment (J46) |
| Fluctuations in informal employment (J46) | Fluctuations in formal economy output (E32) |
| Fluctuations in formal economy output (E32) | Fluctuations in informal economy output (E26) |