Mariana Odio Zuniga (Washington University in St. Louis) (Webinar)

“Informality, Family, and Taxation: How Joint-Household Behavior Affects the Labor Market”

Abstract. How do joint-household behavior and taxation impact the formal-informal labor market composition in developing countries? Using data from the Brazilian Monthly Employment Survey and the formalization policy SuperSimples (2007), under a matching difference-in-differences approach, we show that responses to the policy depend on the initial sorting of the household into the labor market sectors. We structurally estimate a household search model with formal and informal sectors to study the labor market dynamics. We exploit the exogenous variation of the policy to evaluate, quantify, and decompose the causal impact for heterogeneous workers into labor-supply and labor-demand channels. We find: (1) The policy positively impacted the formality rate by 14%, mainly explained by higher job-finding rates, where 44% of the inflows correspond to married women with a formally employed spouse; (2) changes in the conditional wage distributions are the policy’s most effective mechanism; (3) welfare gains of 4.2% and improvements in inequality of 4% arise especially for informal men; (4) the policy effect is ambiguous when decomposed by gender and marital status; and (5) younger workers respond the most to policy changes, leading to higher formality rates in the long-run. Thus, these results provide new avenues for policymakers to design cost-effective targeted policies and social programs that will improve labor market performance, inequality, welfare, and the aggregate economy.