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Trade, Informality and Enforcement: Evidence from Brazil Vladimir - - PowerPoint PPT Presentation

May 07, 2023 44 likes •504 views

Facts Informality Trade & Informality Trade, Informality and Enforcement: Evidence from Brazil Vladimir Ponczek (EESP/FGV) Gabriel Ulyssea (PUC-Rio) Globalization and Labor Market Outcomes in Developing Countries ILO Geneva

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Facts Informality Trade & Informality

Trade, Informality and Enforcement: Evidence from Brazil

Vladimir Ponczek (EESP/FGV) Gabriel Ulyssea (PUC-Rio) Globalization and Labor Market Outcomes in Developing Countries ILO

Geneva – September, 2015

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Facts Informality Trade & Informality

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality

Real Wages: 44.8% increase in the past 10 years

R$ ¡1.056,6 ¡ R$ ¡1,135.7 ¡ R$ ¡1,177.5 ¡ R$ ¡1,081.0 ¡ R$ ¡1,087.8 ¡ R$ ¡1,056.8 ¡ R$ ¡988.9 ¡ R$ ¡1,038.7 ¡ R$ ¡1,123.1 ¡ R$ ¡1,161.9 ¡ R$ ¡1,192.3 ¡ R$ ¡1,221.0 ¡ R$ ¡1,347.8 ¡ R$ ¡1,432.6 ¡ 800 ¡ 900 ¡ 1,000 ¡ 1,100 ¡ 1,200 ¡ 1,300 ¡ 1,400 ¡ 1,500 ¡ 1992 ¡ 1993 ¡ 1994 ¡ 1995 ¡ 1996 ¡ 1997 ¡ 1998 ¡ 1999 ¡ 2000 ¡ 2001 ¡ 2002 ¡ 2003 ¡ 2004 ¡ 2005 ¡ 2006 ¡ 2007 ¡ 2008 ¡ 2009 ¡ 2010 ¡ 2011 ¡ 2012 ¡ 4 / 36

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Facts Informality Trade & Informality

Wage Inequality

1.4 1.6 1.8 2 2.2 90-10 Ratio 1995 1997 1999 2001 2003 2005 2007 2009 2012

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Facts Informality Trade & Informality

Cumulative Log Changes in Wages at the 90th, 50th and 10th Percentiles

  • .4
  • .2

.2 .4 .6 Cummulative Log(Wage) Change 1995 1997 1999 2001 2003 2005 2007 2009 2012

  • Pct. 10
  • Pct. 50
  • Pct. 90

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Facts Informality Trade & Informality

Relative Labor Supply

  • 3
  • 2
  • 1

1 Relative Labor Supply 1995 1997 1999 2001 2003 2005 2007 2009 2012 HS Dropout HS Some College College +

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Facts Informality Trade & Informality

Composition Adjusted Skill Premia

.5 1 1.5 Adjusted Wage Gaps 1995 1997 1999 2001 2003 2005 2007 2009 2012 HS Dropout HS Some College College +

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Facts Informality Trade & Informality

Labor market informality over Three Decades

(a) The 1980’s and 1990’s (b) The 2000’s

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Facts Informality Trade & Informality

Informality and Trade: 1980’s and 90’s

0.00 ¡ 0.10 ¡ 0.20 ¡ 0.30 ¡ 0.40 ¡ 0.50 ¡ 0.60 ¡ 0.70 ¡ 0.000 ¡ 0.020 ¡ 0.040 ¡ 0.060 ¡ 0.080 ¡ 0.100 ¡ 0.120 ¡ 1982 ¡II ¡ 1982 ¡IV ¡ 1983 ¡II ¡ 1983 ¡IV ¡ 1984 ¡II ¡ 1984 ¡IV ¡ 1985 ¡II ¡ 1985 ¡IV ¡ 1986 ¡II ¡ 1986 ¡IV ¡ 1987 ¡II ¡ 1987 ¡IV ¡ 1988 ¡II ¡ 1988 ¡IV ¡ 1989 ¡II ¡ 1989 ¡IV ¡ 1990 ¡II ¡ 1990 ¡IV ¡ 1991 ¡II ¡ 1991 ¡IV ¡ 1992 ¡II ¡ 1992 ¡IV ¡ 1993 ¡II ¡ 1993 ¡IV ¡ 1994 ¡II ¡ 1994 ¡IV ¡ 1995 ¡II ¡ 1995 ¡IV ¡ 1996 ¡II ¡ 1996 ¡IV ¡ 1997 ¡II ¡ 1997 ¡IV ¡ 1998 ¡II ¡ 1998 ¡IV ¡ 1999 ¡II ¡ 1999 ¡IV ¡ 2000 ¡II ¡ 2000 ¡IV ¡ 2001 ¡II ¡ 2001 ¡IV ¡ 2002 ¡II ¡ 2002 ¡IV ¡ Imports/GDP ¡

Imports/GDP ¡and ¡Informality ¡

Imports/GDP ¡ Informality ¡ Informality ¡ 10 / 36

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Facts Informality Trade & Informality

Formal-Informal Wage Gap in Brazil – Cross-Section

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Facts Informality Trade & Informality

Wage Gap by Skill Level – Panel of Workers

(1) (2) (3) (4) Formal 0.068*** 0.113*** (0.008) (0.025) Formal x Schooling 1 0.074*** (0.019) Formal x Schooling 2 0.056*** (0.021) Formal x Schooling 3 0.015 (0.024) Formal x Age

  • 0.002**

(0.001) Formal x Wage ∈ Q1 0.171*** (0.014) Formal x Wage ∈ Q2 0.057*** (0.017) Formal x Wage ∈ Q3 0.037** (0.018) Formal x Wage ∈ Q4

  • 0.065***

(0.019) Number of observations 48,263 48,263 48,263 48,263 Sample: PME 2007- 2008 - Employed indiv. aged b/t 16 - 65 years old Dependent Variable: Log of net wages Control variable: Firm size - number of employees

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Facts Informality Trade & Informality

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality

Different margins of informality Two fundamental dimensions of informality:

1

Firm Informality

(i) Extensive Margin: firms not registered with the tax authorities ⇒ 61.4% of all entrepreneurs in Brazil (2011). (ii) Intensive margin: Formal firms that hire informal workers.

2

Labor informality: Employees from (i) + (ii). Labor informality decreased substantially in the past decade but firm informality remains high, ≈ 2/3 of all firms (PNAD 2012).

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Facts Informality Trade & Informality

Adding some structure In another paper I develop an equilibrium entry model where firms can exploit both the intensive and extensive margins of informality. Firm heterogeneity, selection, and burdensome regulations that are imperfectly enforced are the driving forces of both margins. I use the two-stage simulated method of moments estimator and data from formal and informal firms in Brazil to estimate the model. I use the estimated model to back out the distribution of informal firms in the data. I assess the micro and macro impacts of: (i) ↓↓ costs of formality (entry costs and payroll tax); and (ii) ↑↑ the costs of both margins of informality (enforcement).

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Facts Informality Trade & Informality

What is the distribution of firm types in the informal sector?

Firm's ¡Value ¡Func/on ¡Net ¡of ¡Entry ¡Costs ¡ Firm's ¡produc/vity ¡

Baseline ¡Net ¡Value ¡Func/on: ¡ Informal ¡Sector ¡[ ¡Vi(θ) ¡-­‑ ¡Ei] ¡ Baseline ¡Net ¡Value ¡Func/on: ¡ Formal ¡Sector ¡[ ¡Vf(θ) ¡-­‑ ¡Ef] ¡ Counterfactual ¡Net ¡Value ¡Func/on: ¡ Formal ¡Sector ¡ ¡[ ¡Vf(θ) ¡-­‑ ¡Ei] ¡

θ1 ¡ θ2 ¡ θ3 ¡ 0 ¡ De ¡Soto's ¡ View ¡ = ¡13.4% ¡ Parasite ¡ View ¡ = ¡48.1% ¡ Survival ¡ View ¡ = ¡38.5% ¡

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Facts Informality Trade & Informality

What are the potential consequences of higher enforcement? Aggregate policies impacts

Baseline Entry Costs Payroll Tax Extensive Mg. Intensive Mg. Informal workers (share) 0.350 0.341 0.228 0.126 0.310 Informal firms (share) 0.691 0.475 0.606 0.129 0.724 GDP 1.000 1.034 0.999 0.996 0.980 TFP 1.000 0.950 1.072 1.130 1.005 Olley & Pakes 0.557 0.649 0.597 0.681 0.540 Wages 1.000 1.029 1.134 0.978 0.999 Tax Revenues 1.000 1.096 0.891 1.214 0.984 Mass of active firms 1.000 1.207 0.861 0.711 0.974 Welfare 1.000 1.029 0.987 1.009 0.991

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Facts Informality Trade & Informality

What are the potential consequences of higher enforcement? Aggregate policies impacts

Baseline Entry Costs Payroll Tax Extensive Mg. Intensive Mg. Informal workers (share) 0.352 0.351 0.228 0.138 0.301 Informal firms (share) 0.695 0.477 0.613 0.039 0.728 Informal GDP (share) 0.260 0.198 0.191 0.005 0.271 GDP 1.000 1.035 0.991 0.994 0.984 TFP 1.000 0.951 1.076 1.133 1.005 Olley & Pakes 0.559 0.657 0.597 0.684 0.536 Wages 1.000 1.029 1.141 0.981 0.999 Tax Revenues 1.000 1.094 0.881 1.216 0.986 Mass of active firms 1.000 1.210 0.851 0.651 0.975 Welfare 1.000 1.199 0.973 1.012 0.987

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Facts Informality Trade & Informality

What are the potential consequences of higher enforcement? Aggregate policies impacts

Baseline Entry Costs Payroll Tax Extensive Mg. Intensive Mg. Informal workers (share) 0.352 0.351 0.228 0.138 0.301 Informal firms (share) 0.695 0.477 0.613 0.039 0.728 Informal GDP (share) 0.260 0.198 0.191 0.005 0.271 GDP 1.000 1.035 0.991 0.994 0.984 TFP 1.000 0.951 1.076 1.133 1.005 Olley & Pakes 0.559 0.657 0.597 0.684 0.536 Wages 1.000 1.029 1.141 0.981 0.999 Tax Revenues 1.000 1.094 0.881 1.216 0.986 Mass of active firms 1.000 1.210 0.851 0.651 0.975 Welfare 1.000 1.199 0.973 1.012 0.987

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Facts Informality Trade & Informality

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality The Paper in a Nutshell

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality The Paper in a Nutshell

The Paper in a Nutshell Questions: What was the impact of Brazilian trade liberalization on local labor markets? Were there heterogeneous impacts across workers’ skill level? Was the informal sector a buffer for harder-hit regions? Empirical Strategy: Local labor markets approach (e.g. Topalova, 2010; Kovak, 2013; Autor et al., 2013; Dix-Carneiro and Kovak, 2015). We exploit cross-industry variation in tariff changes + regional variation in employment composition + regional variation in enforcement.

RTC

Data: Demographic Census (1980, 1991, 2000); import tariffs (from Kume, 1993); enforcement data from Ministry of Labor and Almeida and Carneiro (2011).

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Facts Informality Trade & Informality The Brazilian Trade Liberalization

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality The Brazilian Trade Liberalization

Nominal tariffs changes across industries

Source: Hirata and Soares (2015).

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Facts Informality Trade & Informality The Brazilian Trade Liberalization

Trade opening in Brazil

20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 0% 5% 10% 15% 20% 25% 30% 35% 1990 1991 1992 1993 1994 1995 1996

Average Tariffs Rate Imports (US$)

Source: Baumann (1997)

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Facts Informality Trade & Informality The Brazilian Trade Liberalization

Changes in log(1 + tariff), 1990-1995

Figure 1. Relationship between Tariff Changes and Preliberalization Tariff Levels

Petroleum, gas, coal Agriculture Mineral mining Petroleum refining Chemicals Paper, publishing, printing Metals Wood, furniture, peat Footwear, leather Pharma, perf, det Nonmetallic mineral manufacturing Textiles Food processing Machinery, equipment Plastics Other manufacturing Electric, electronic equipment Rubber Apparel Auto, transport, vehicles

–0.25 −0.2 −0.15 −0.1 −0.05

1990–1995 change in log(1 + t)

0.1 0.2 0.3 0.4

1990 preliberalization log(1 + t)

Source: Dix-Carneiro and Kovak (2015).

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Facts Informality Trade & Informality Results

Outline

1

Overview of the Basic Facts

2

Informality

3

Trade Liberalization, Informality and Enforcement

The Paper in a Nutshell The Brazilian Trade Liberalization Results

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Facts Informality Trade & Informality Results

Results across skill levels (1/2)

Table 1: Effects of Regional Tariff Changes on: Informality and Non-Employment

  • Dep. Var.: Informality
  • Dep. Var.: Non-employment

All Workers Unskilled Skilled All Workers Unskilled Skilled RTC

  • 0.359***
  • 0.214***

(0.128) (0.038) RTC-Unskilled

  • 0.792***
  • 0.341***

(0.116) (0.031) RTC-Skilled 0.169 0.004 (0.354) (0.152) Observations 413 413 413 413 413 413 R-squared 0.812 0.898 0.714 0.826 0.862 0.840 Notes: Robust standard errors in parentheses. Significant at the *** 1 percent, ** 5 percent, and * 10 percent level.

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Facts Informality Trade & Informality Results

Results across skill levels (2/2)

Table 2: Regional Tariff Changes on: Wages by Skill Level and Formal-Informal Wage Gap

  • Dep. Var.: Formal-Informal Wage Gap
  • Dep. Var.: Wages

All Workers Unskilled Skilled Unskilled Skilled RTC 0.105 (0.245) RTC-Unskilled 0.002 1.193*** (0.259) (0.328) RTC-Skilled

  • 0.117

0.825 (0.226) (0.631) Observations 413 413 413 413 413 R-squared 0.610 0.522 0.918 0.958 0.965 Notes: Robust standard errors in parentheses. Significant at the *** 1 percent, ** 5 percent, and * 10 percent level.

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Facts Informality Trade & Informality Results

How large are these effects? Moving from 10th to 90th percentiles of tariff reduction (RTC=-0.1): Informality: 3.6% increase (average of 7.7%). Non-Employment: 2.1% increase (average of 2%).

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Facts Informality Trade & Informality Results

How large are these effects? S˜ ao Paulo (avg. of 62 micro-regions): ∆Tariffs ≈ −0.08; ∆Informality = 7.6% and ∆Non-Employment = 3.6%.

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Facts Informality Trade & Informality Results

How large are these effects? Maranh˜ ao (avg. of 14 micro-regions): ∆Tariffs ≈ −0.01; ∆Informality = 10.3% and ∆Non-Employment ≈ 0%.

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Facts Informality Trade & Informality Results

Heterogeneous effects across regions with different enforcement levels We estimate the following IV regressions: ∆91−00Yr = β0 + β1Tariff Changer +β2Tariff Changer × Enforcementr + γ′Dr + ur Yr = informality, non-employment, formal-informal wage gaps, and wages in region r. Enforcement = Total inspections (1995–2000) per firms in region r. We plot graphs of the marginal effect of tariff changes evaluated at the 10th,...,90th percentiles of the enforcement distribution:

  • Mg. Effect = β1 + β2 × Enforcementq

where q = 10, ..., 90.

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Facts Informality Trade & Informality Results

Tariff Changes and Informality by Enforcement Deciles – All Workers

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Facts Informality Trade & Informality Results

Tariff Changes and Informality by Enforcement Deciles – Unskilled

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Facts Informality Trade & Informality Results

Tariff Changes and Informality by Enforcement Deciles – Skilled

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Facts Informality Trade & Informality Results

Tariff Changes and Non-Employment by Enforcement Deciles –All Workers

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Facts Informality Trade & Informality Results

Tariff Changes and Non-Employment by Enforcement Deciles – Unskilled

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Facts Informality Trade & Informality Results

Tariff Changes and Non-Employment by Enforcement Deciles – Skilled

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Facts Informality Trade & Informality Results

Final Remarks Regions hit harder by the trade liberalization experienced higher informality and non-employment relatively to regions less affected. These adverse impacts were heterogeneous:

Overall effects largely come from unskilled workers. Stricter enforcement: (i) reduces effects on informality in harder-hit regions; but (ii) amplifies the increases in non-employment.

The results suggest that informality might have acted as a buffer; non-employment effects would have been larger if enforcement was stricter. All effects are relative, we cannot say anything at the aggregate level. Overall welfare might have increased.

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Facts Informality Trade & Informality Results

Is it only the minimum wage

source: PNAD 2013 Back 37 / 36

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Facts Informality Trade & Informality Results

Heterogeneous Wage Gap and Labor Courts in Brazil Labor regulations are pervasive and cumbersome in Brazil. Even for Latin American Countries Labor Courts are part of a special branch of the judiciary system responsible for judging labor disputes Labor Courts has a pro-worker approach (hyposufficient thesis) In 2014 around 4 millions workers filed labor lawsuits against their employers

Compared to 3,000 in Japan and 100,000 in the US

On average plaintiffs are less schooled and earn less than an average Brazilian worker

Reputational concerns may disincentive more skilled worker to sue their employers It is possible to build SPNE where skilled workers do not sue (or sue less

  • ften than unskilled worker).

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Facts Informality Trade & Informality Results

Regional Trade Shock

Back 39 / 36

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Facts Informality Trade & Informality Results

Region Tariff Changes – Kovak (2013)

RTCr = X

i

βrid ln(1 + τi) where βri =

λri θi

P

i λri θi

λri = Lri

Lr is the fraction of regional labor allocated to industry i at region r; and θi is

is equal to one minus wagebill share of industry i.

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Facts Informality Trade & Informality Results

Regressions

Table 3: Effects of Regional Tariff Changes on: Informality and Non-Employment

  • Dep. Var.: Informality
  • Dep. Var.: Non-employment

All Workers Unskilled Skilled All Workers Unskilled Skilled RTC

  • 0.359***
  • 0.214***

(0.128) (0.038) RTC-Unskilled

  • 0.792***
  • 0.341***

(0.116) (0.031) RTC-Skilled 0.169 0.004 (0.354) (0.152) Observations 413 413 413 413 413 413 R-squared 0.812 0.898 0.714 0.826 0.862 0.840 Notes: Robust standard errors in parentheses. Significant at the *** 1 percent, ** 5 percent, and * 10 percent level.

Back to Informality Back to Non-Employment 41 / 36

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Facts Informality Trade & Informality Results

Regressions

Table 4: Regional Tariff Changes on: Wages by Skill Level and Formal-Informal Wage Gap

  • Dep. Var.: Formal-Informal Wage Gap
  • Dep. Var.: Wages

All Workers Unskilled Skilled Unskilled Skilled RTC 0.105 (0.245) RTC-Unskilled 0.002 1.193*** (0.259) (0.328) RTC-Skilled

  • 0.117

0.825 (0.226) (0.631) Observations 413 413 413 413 413 R-squared 0.610 0.522 0.918 0.958 0.965 Notes: Robust standard errors in parentheses. Significant at the *** 1 percent, ** 5 percent, and * 10 percent level.

Back to Wage Gaps Back to Wage Changes 42 / 36