Informality and Long‐Run Growth

Abstract

One of the most salient features of developing economies is the existence of a large informal sector. In this paper, we use quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor, and long-run growth. Our model can generate transitory informality equilibria or informality-induced poverty traps. Its calibration reveals that the case for the poverty-trap hypothesis arises: although informality serves to protect low-skilled workers from extreme poverty in the short run, it prevents income convergence between developed and developing nations in the long run. Then we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means-tested education subsidies is the most costeffective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means-tested education and wage subsidies is even more effective.

Child brides or child labor in a worst form?

“…The goal is to try to keep children out of work by establishing a minimum age limit and by compelling governments to apply social policies for promoting education and preventing poverty. Yet child labor persists all over the world, not only in poor regions but also in wealthier ones, and it remains tied to the informal sector (Docquier, Müller, & Naval, ; International Labour Office, ). That is why child labor is still an issue that tops the ILO agenda.…”

Optimal education policy and human capital accumulation in the context of brain drain

“…They demonstrate that, by allowing a certain proportion of highly-skilled individuals to emigrate to a richer country, the government of the home country can stimulate expected returns to schooling so as to obtain the socially desirable level of human 4 Some of the early contributions to this literature include Bhagwati and Hamada (1974), Djajić (1989), Miyagiwa (1991), Mountford (1997), Wong (1997), Stark et al (1997), Vidal (1998), and Wong and Yip (1999). See also Klein and Ventura (2009), Benhabib and Jovanovic (2012), Ortega andPeri (2014), di Giovanni et al (2015), and Docquier et al (2017and Docquier et al ( , 2018 for more recent analysis of the welfare implications at the global level.…”

Informal Sector Economy, Child Labor and Economic Growth in Developing Economies: Exploring the Interlinkages

“…The capital constrained families rely on the income from their child labor. These children remain unable to go to school and therefore lower the chances of evading poverty (Docquier, Müller, & Naval, 2014). Informal sector provides employment to the large number of people particularly in developing economies so it is wide spread phenomenon.…”

“…Kadonya, Madihi, and Mtwana (2020) conducted a study on the worst forms of child labor in informal sector of Tanzania and concluded that there is high prevalence of worst form of child labor in the informal activities. Docquier et al (2014) found that informality increases the child labor. Kambhampati and Rajan (2006) attempted to analyze the relationship between economic growth and child labor.…”

“…Numerous studies have attempted to ensure the relationship between economic growth and child labor Kambhampati and Rajan (2006); Abdullahi and Noor (2015). Similarly, a number of studies tried to investigate the relationship between informal economy and economic growth (Buehn & Schneider, 2008;Docquier et al, 2014;Elgin & Birinci, 2016;Loayza, 1996;Schneider et al, 2010). We shall investigate the interrelationship between informal sector economy, child labor and economic growth in developing countries that is lacking in the existing literature.…”