Modelling labour supply with informality for the evaluation of tax-benefit reforms in Ecuador
Labour informality represents a major problem for developing countries, especially those in Latin America, where on average, 60 percent of the labour force works in the informal sector. Ecuador has had an important reduction in informality over the last decade. However, informal employment remains high at a 60% rate. Understanding the effects of tax and benefit reforms in the presence of informality remains a significant challenge for academics and policy makers. Although static microsimulation techniques enable a detailed assessment of first-round distributional and budgetary effects of policy reforms, it is important to consider potential second-round behavioural responses, especially when large changes to the current tax-benefit design are simulated.
The first work package consists in harmonizing and adjusting the 2017 Encuesta de Empleo, Desempleo y Subempleo (ENEMDU) to use it as input data of ECUAMOD, the static tax-benefit microsimulation model of Ecuador. ENEMDU 2017 has been chosen as data for the analysis because it contains a larger sample size than the most recent ENEMDU 2018. Expenditures information will be imputed into ENEMDU 2017 from other available microdata in order to allow the calculation of deductions from personal expenditures as part of the simulation of personal income tax. Information from tax records data will be used to correct problems of top income undercoverage in ENEMDU in order to allow for a better simulation of personal income tax revenue.
The second work package will estimate a labour supply model for Ecuador based on ECUAMOD running with ENEMDU 2017. The analysis will follow the literature on structural labour supply models. More precisely, two types of labour supply models will be estimated. First, a discrete choice model à la Van Soest will be estimated. Then, a Random Utility Random Opportunity (RURO) model will be estimated. An important characteristic of the Ecuadorian labour market (and other developing economies) is the presence of large informal employment. For this reason, both types of labour supply models proposed in this work package will incorporate informal employment as an additional margin of decision in individuals labour supply choices.
The third work package will test the estimated labour supply models by means of hypothetical policy reforms. The analysis will focus on the distributional and behavioural effects of the counterfactual reform and will discuss the policy implications of the illustrative reform.
Start date
25 Nov 2020
End date
14 Aug 2021
Funder
UNU-WIDER (SOUTHMOD)