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Trade openness effects through price channels on firms informal employment: The case of Peru Trade openness effects through price channels on firms informal employment: The case of Peru Symposium: TRADE AND EMPLOYMENT IN

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’

Symposium: TRADE AND EMPLOYMENT IN DEVELOPING COUNTRIES

Dr. Jorge Davalos1

1‘Universidad del Pacifico’, Lima-Peru. je.davalosc@up.edu.pe

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’

This paper...

Estimates the impact of sector specific price shocks on informal employment demand (Peru’s economic sectors) Develops a structural specification and proposes an additive decomposition (m1 + m2) Results point to:

A dominant first component (m1) implies that regulatory costs are too important ‘informality traps’

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’

This paper...

Estimates the impact of sector specific price shocks on informal employment demand (Peru’s economic sectors) Develops a structural specification and proposes an additive decomposition (m1 + m2) Results point to:

A dominant first component (m1) implies that regulatory costs are too important ‘informality traps’

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’

This paper...

Estimates the impact of sector specific price shocks on informal employment demand (Peru’s economic sectors) Develops a structural specification and proposes an additive decomposition (m1 + m2) Results point to:

A dominant first component (m1) implies that regulatory costs are too important ‘informality traps’

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’

This paper...

Estimates the impact of sector specific price shocks on informal employment demand (Peru’s economic sectors) Develops a structural specification and proposes an additive decomposition (m1 + m2) Results point to:

A dominant first component (m1) implies that regulatory costs are too important ‘informality traps’

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Trade openness a key economic driver, thus, its indirect implications are of great of interest Among them, employment quality

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Trade openness a key economic driver, thus, its indirect implications are of great of interest Among them, employment quality

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Trade openness a key economic driver, thus, its indirect implications are of great of interest Among them, employment quality

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Informal employment (ILO definition):

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Informal employment (ILO definition):

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Informal employment (ILO definition): Informal employment exists in formal enterprises (public sector as well)

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Motivation

Motivation

Informal employment (ILO definition): As expected, informality is mainly concentrated in informal firms

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Economic model: core assumptions

a. Under autarky (in a single sector), local prices may be above
r below international ones
b. As trade openness increases, local prices converge to

international ones. This implies that local prices (and firms’ profits) may increase or diminish

c. Smaller firms, are less likely to be controlled by fiscal and

regulatory institutions ⇒ more likely to allocate informal jobs (Almeida and Carneiro, 2009). Informal jobs are less costly

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Economic model: core assumptions

a. Under autarky (in a single sector), local prices may be above
r below international ones
b. As trade openness increases, local prices converge to

international ones. This implies that local prices (and firms’ profits) may increase or diminish

c. Smaller firms, are less likely to be controlled by fiscal and

regulatory institutions ⇒ more likely to allocate informal jobs (Almeida and Carneiro, 2009). Informal jobs are less costly

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Economic model: core assumptions

a. Under autarky (in a single sector), local prices may be above
r below international ones
b. As trade openness increases, local prices converge to

international ones. This implies that local prices (and firms’ profits) may increase or diminish

c. Smaller firms, are less likely to be controlled by fiscal and

regulatory institutions ⇒ more likely to allocate informal jobs (Almeida and Carneiro, 2009). Informal jobs are less costly

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Economic model: core assumptions

a. Under autarky (in a single sector), local prices may be above
r below international ones
b. As trade openness increases, local prices converge to

international ones. This implies that local prices (and firms’ profits) may increase or diminish

c. Smaller firms, are less likely to be controlled by fiscal and

regulatory institutions ⇒ more likely to allocate informal jobs (Almeida and Carneiro, 2009). Informal jobs are less costly

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Economic model: a-priori implications

d. From (b) and (c), trade openness increase will encourage

informal employment if international prices are below autarky

nes (positive relationship).
e. From (d), higher international prices, with respect to autarky
nes, imply a negative relationship.

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Production function q = alα˜ lβkγ ; q = aklα˜ lβ For the sake of simplicity, capital is assumed fixed such that ak = aK γ Firms maximize their expected profit: ˜ pq − (wl + ˜ w˜ l + ψδτ) (1)

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Production function q = alα˜ lβkγ ; q = aklα˜ lβ For the sake of simplicity, capital is assumed fixed such that ak = aK γ Firms maximize their expected profit: ˜ pq − (wl + ˜ w˜ l + ψδτ) (1)

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Production function q = alα˜ lβkγ ; q = aklα˜ lβ For the sake of simplicity, capital is assumed fixed such that ak = aK γ Firms maximize their expected profit: ˜ pq − (wl + ˜ w˜ l + ψδτ) (1)

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Production function q = alα˜ lβkγ ; q = aklα˜ lβ For the sake of simplicity, capital is assumed fixed such that ak = aK γ Firms maximize their expected profit: ˜ pq − (wl + ˜ w˜ l + ψδτ) (1)

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Production function q = alα˜ lβkγ ; q = aklα˜ lβ For the sake of simplicity, capital is assumed fixed such that ak = aK γ Firms maximize their expected profit: ˜ pq − (wl + ˜ w˜ l + ψδτ) (1)

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally...

Expected regulation cost: ψδτ ψ Probability to be controlled ψ = l l +˜ l λ ; l(l +˜ l) < λ ⇒ ψ ǫ [0, 1) δ Firm’s informality degree δ = ˜ l ˜ l + l ⇒ δ ǫ [0, 1] τ Maximum penalty fee...τδ penalty fee is proportional to informality degree ψδτ ≡ τl˜ l/λ

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Motivation

Control probability ψ :

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally

‘Local’ prices faced by the firm ˜ p ˜ p = p1−ω0 pω0 ; ω0 = 1 1 + η , η ǫ [0, ∞) (2) p0 autarky price p international price η Trade-openness

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally

‘Local’ prices faced by the firm ˜ p ˜ p = p1−ω0 pω0 ; ω0 = 1 1 + η , η ǫ [0, ∞) (2) p0 autarky price p international price η Trade-openness

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally

‘Local’ prices faced by the firm ˜ p ˜ p = p1−ω0 pω0 ; ω0 = 1 1 + η , η ǫ [0, ∞) (2) p0 autarky price p international price η Trade-openness

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally

From the latter, d log(˜ p) = 1 (1 + η)2 log( p p0 )dη (3) A multiplier with respect to η relates to d log ˜ p

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Formally

From the latter, d log(˜ p) = 1 (1 + η)2 log( p p0 )dη (3) A multiplier with respect to η relates to d log ˜ p

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Informal employment relative demand (˜ l/l) elasticity: d ˜ l ˜ l − d l l = (2 − α − β)(β − α) (1 − α)(1 − β)

+ (2 − α − β)wl (1 − β)ψδτ − (2 − α − β)˜ w˜ l (1 − α)ψδτ

d p p

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Informal employment relative demand (˜ l/l) elasticity: m1’s sign depends on β − α i.e. firms increase the demand of their intensive labour (informal or formal) m2’s sign depends on (1 − α)wl − (1 − β)˜ w˜ l i.e.firms increase the demand of the ‘cheaper’2 labour

m2’s effect diminishes with the regulatory cost ψδτ

2A weighted payrolls criteria

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Informal employment relative demand (˜ l/l) elasticity: m1’s sign depends on β − α i.e. firms increase the demand of their intensive labour (informal or formal) m2’s sign depends on (1 − α)wl − (1 − β)˜ w˜ l i.e.firms increase the demand of the ‘cheaper’2 labour

m2’s effect diminishes with the regulatory cost ψδτ

2A weighted payrolls criteria

SLIDE 39

‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Informal employment relative demand (˜ l/l) elasticity: m1’s sign depends on β − α i.e. firms increase the demand of their intensive labour (informal or formal) m2’s sign depends on (1 − α)wl − (1 − β)˜ w˜ l i.e.firms increase the demand of the ‘cheaper’2 labour

m2’s effect diminishes with the regulatory cost ψδτ

2A weighted payrolls criteria

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The economic model

Informal employment relative demand (˜ l/l) elasticity: m1’s sign depends on β − α i.e. firms increase the demand of their intensive labour (informal or formal) m2’s sign depends on (1 − α)wl − (1 − β)˜ w˜ l i.e.firms increase the demand of the ‘cheaper’2 labour

m2’s effect diminishes with the regulatory cost ψδτ

2A weighted payrolls criteria

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Data: Households Survey, employment module (ENAHO) 2004-2013 National accounts from 2007 census Pseudo-panel of economic sectors

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Data: Households Survey, employment module (ENAHO) 2004-2013 National accounts from 2007 census Pseudo-panel of economic sectors

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Data: Households Survey, employment module (ENAHO) 2004-2013 National accounts from 2007 census Pseudo-panel of economic sectors

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Data: Households Survey, employment module (ENAHO) 2004-2013 National accounts from 2007 census Pseudo-panel of economic sectors

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

From theoretical labour shares... wl pq = α − ψδτ pq + θ l pq ≡ α − τ λ ˜ l l pq + θ l pq ˜ w˜ l pq = β − ψδτ pq + ˜ θ ˜ l pq ≡ β − τ λ ˜ l l pq + ˜ θ ˜ l pq

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

From theoretical labour shares... wl pq = α − ψδτ pq + θ l pq ≡ α − τ λ ˜ l l pq + θ l pq ˜ w˜ l pq = β − ψδτ pq + ˜ θ ˜ l pq ≡ β − τ λ ˜ l l pq + ˜ θ ˜ l pq

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

... to estimating equations: E (yi|xi, zi) = αi − τ λxi + θzi ; E (˜ yi|xi, ˜ zi) = βi − τ λxi + ˜ θ˜ zi

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

... to estimating equations: E (yi|xi, zi) = αi − τ λxi + θzi ; E (˜ yi|xi, ˜ zi) = βi − τ λxi + ˜ θ˜ zi

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

m1 component

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

m1 component

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Figure: m1 multiplier (vertical) and Informality degree (horizontal)

Informal sectors exhibit higher m1...‘informality traps’ ?

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Figure: m1 multiplier (vertical) and Informality degree (horizontal)

Informal sectors exhibit higher m1...‘informality traps’ ?

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

Figure: m1 multiplier (vertical) and Informality degree (horizontal)

Informal sectors exhibit higher m1...‘informality traps’ ?

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

m2 component... often exhibits m1s opposite sign!but it’s too small

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

m2 component... often exhibits m1s opposite sign!but it’s too small

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ The econometric model

The econometric model

m2 component... often exhibits m1s opposite sign!but it’s too small

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‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Concluding remarks

Concluding remarks

m1 dominates m2 which implies the existence of sectoral informality traps! Regulatory framework is homogenous. Results suggest that sectors/firms prone to informality could receive some regulatory incentives to create formal jobs Peru’s slight improvements in informality are could be explained by slight structural changes.

SLIDE 58

‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Concluding remarks

Concluding remarks

m1 dominates m2 which implies the existence of sectoral informality traps! Regulatory framework is homogenous. Results suggest that sectors/firms prone to informality could receive some regulatory incentives to create formal jobs Peru’s slight improvements in informality are could be explained by slight structural changes.

SLIDE 59

‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Concluding remarks

Concluding remarks

m1 dominates m2 which implies the existence of sectoral informality traps! Regulatory framework is homogenous. Results suggest that sectors/firms prone to informality could receive some regulatory incentives to create formal jobs Peru’s slight improvements in informality are could be explained by slight structural changes.

SLIDE 60

‘Trade openness effects through price channels on firms’ informal employment: The case of Peru’ Concluding remarks

Concluding remarks

m1 dominates m2 which implies the existence of sectoral informality traps! Regulatory framework is homogenous. Results suggest that sectors/firms prone to informality could receive some regulatory incentives to create formal jobs Peru’s slight improvements in informality are could be explained by slight structural changes.