Short, Long and Spatial Dynamics of Informal Employment

This paper analyses the role of informality within a country both theoretically and empirically. By extending a stochastic two-sector theoretical model, we incorporate spatial effects connecting informality across regions and we are able to discriminate between informality as a complement to and a substitute for formal activities. The empirical analysis is developed for the Italian case by combining two datasets based upon direct and indirect estimates of informal employment. The following results are achieved. Informal activities are positively driven by the inefficient provision of public goods, tighter credit markets and a high tax burden. Informal agents may evaluate the possibility of migrate towards another region in search of formality. National aggregate shocks in productivity and employment can trigger asymmetric disaggregate responses of informality in different areas