Abstract
Kyrkopoulou and Palivos examine the interaction between the informal sector of the economy and undocumented immigration. For this purpose, they use a search and matching model with two sectors, a formal and an informal one. Native workers can work in both sectors, whereas undocumented immigrants can work only in the latter. Both native workers and firms choose optimally the sector in which they operate, balancing costs and benefits, for example, taxation versus unemployment benefits and severance payments in the case of workers and taxation and auditing versus subsidies in the case of firms. The effects of three types of policies are analyzed and compared: deterrence, incentive, and immigration policies. Combinations of these are also considered.
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Notes
- 1.
Schneider et al. (2010) finds that the average size of the informal sector in southern Europe countries, during the period 1999–2007, was 25% of official GDP.
- 2.
- 3.
We abstract from legal immigration. Alternatively, one can assume that legal immigrants are lumped together with natives.
- 4.
In this model, there are no quits and every termination of employment is a no-fault dismissal.
- 5.
We assume that η is the penalty rate net of any administrative cost that is necessary to enforce the law.
- 6.
Battisti et al. (2018) cite empirical evidence in support of this assumption.
- 7.
We assume that wages are constantly renegotiated at no cost. Hence, the relevant wage for an unemployed worker who contacts a firm in the formal sector for the first time, and hence is not entitled to a severance payment, is the same wage as the one for an already employed worker. This is so, because the unemployed worker will immediately renegotiate the wage once a contract is signed.
- 8.
All proofs are presented in an Appendix available upon request.
- 9.
- 10.
We present below some representative cases; details are available upon request.
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Kyrkopoulou, E., Palivos, T. (2020). Doing Business in the Shadows: Informal Firms, Irregular Immigrants and the Government. In: Vella, E., Caballé, J., Llull, J. (eds) Understanding Migration with Macroeconomics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-40981-4_6
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