Is Informality Good for Business?

Abstract

This paper examines the effects of large inflows of internally displaced persons (IDP), who are primarily absorbed by the informal sector, on the behavior of formal manufacturing firms in Colombia. To identify causal effects, the analysis employs annual, firm-level panel data between 1995 and 2010 and exploits that when conflict intensifies, forcefully displaced individuals tend to migrate to municipalities where people from their origin locations settled earlier. The paper finds that large inflows of IDP induce sizable, negative effects on the intensive and extensive margins of production of formal firms. These effects are stronger for firms operating in sectors that face a stronger competition from the informal economy.

Legalization and Long-Term Outcomes of Immigrant Workers

“…These people often constitute one of the most vulnerable sub-groups in the labor force: readily exploitable, lacking fundamental rights, and with little or no access to basic welfare. Apart from any ethical considerations, their condition may impede assimilation, nurture the shadow economy and, ultimately, diminish the overall welfare of the host country (Kossoudji and Cobb-Clark, 2002;Carter, 2005;Rozo and Winkler, 2021). This effect is likely to persist in the long run.…”