Discussion paper

DP16498 Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles

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.

£6.00
Citation

Elgin, C, M Kose, F Ohnsorge and S Yu (2021), ‘DP16498 Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles‘, CEPR Discussion Paper No. 16498. CEPR Press, Paris & London. https://cepr.org/publications/dp16498