Microsimulation analysis of informal labour markets in developing countries

This PhD thesis addresses one of the most pressing problems in developing countries: labour informality. The overall objective of the thesis is to illustrate the capacity of microsimulation techniques to analyse a broad range of topics related to this problem. To highlight the potential of the methodology we pose a motivating question: what are the barriers that informal workers face to becoming formal? Job contact networks and workers’ social insurance contributions are analysed alongside other usual suspects such as the lack of human capital. The first chapter proposes a tax-benefit microsimulation exercise for Ecuador and Colombia in which we move informal workers to the formal sector. We found that a considerably high proportion of formalization income gains would be taxed away in both countries. The second chapter presents different behavioural models built on the static tax-benefit model for Colombia and considers labour supply responses and job availability constraints. A simulation exercise of pro-formality policies results in a modest to null effect on the composition of the pool of workers between the formal and informal sectors. Lastly, the third chapter presents an agent-based macroeconomic model with an informal sector that introduces the formation of job contacts on the job as a novel feature. After estimating several of the parameters for the Colombian labour market, our exploratory exercise indicates that a high degree of sectoral homophily in contact networks does not seem to contribute to labour market segmentation because the current propensity to use contacts for job search is not relatively high.