Conference Agenda

This paper studies the effect of prohibiting the use of cash for wage disbursements on labor markets in developing countries. We study a reform in Uruguay that mandated wage payments to be disbursed using electronic methods. Using a difference-in-differences approach based on pre-reform sector-level cash intensity, our results indicate that firms in high cash intensity sectors are significantly more likely to discontinue formal activities post-reform. Active firms show a slight reduction in the number of employees and an increase in reported wages. These results are driven by low productivity firms. Complementary results using survey data indicate an increase in informal employment and a decrease in collusive underreporting of earnings partially explain these results. Overall, results suggest that, while eliminating cash for wage payments enhances tax compliance among formal workers, it may also shift some economic activity into full informality, offsetting the revenue gains from improved payroll tax compliance.

We investigate the behavioral response of workers to total marginal taxes (i.e., income taxation and social-security contribution) and discounted marginal pension benefits. Our contributions are threefold. We extend the Saez (2010)-Chetty et al. (2011) framework to: compute the effective marginal tax-benefit rate, which decreases as the worker approaches retirement; show that informality fosters bunching at kinks of the tax schedule, which brings to larger estimates of the elasticity of the formal labor income. Second, we leverage administrative matched employer-employee data to test formal wage earners’ earnings elasticity for changes in effective marginal tax-benefit rates. Third, we find that workers bunch only at the kink determined by pension-benefit cap. Moreover, bunching grows in workers’ age, and the effect is significantly stronger for small firms under the Brazilian simplified tax regime. The latter result highlights the importance of the degree of informality (e.g., of firms, sectors) to explain bunching at kinks.

We explore the effects of a minimum wage hike in 2018 and an upward revision in the first kink in the progressive income tax schedule in 2017 in Zambia, to compare their impacts on wages in both the formal and informal sectors. We show that the minimum wage effects spill over into the informal sector despite being targeted at the formal sector. We propose and show a new lighthouse effect, where tax kinks are a reference point for wage setting in the uncovered informal sector. Results show that the minimum wage increases informal wages by 0.4%. Additionally, a hike in the first tax kink produces similar distributional effects and reduces real wages just above the revised kink of both formal and informal workers. With the informal sector’s persistence on new bunchers driving our results, we confirm that the new lighthouse effect is relevant in the case of a developing country.

We study the dynamics of formal employment, using matched employer-employee panels from ten countries at different income levels, and from across states in Brazil and Colombia. We show that increases in formality rates with development are driven by the extensive rather than the intensive margin of formal employment. Countries and regions with higher formality exhibit a higher rate of job-to-job switches and higher returns to tenure. As a result, formal workers in these regions experience higher life-cycle wage growth.