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Social Insurance, Informality, and Labor MarketsHow to Protect Workers While Creating Good Jobs$
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Markus Frölich, David Kaplan, Carmen Pagés, Jamele Rigolini, and David Robalino

Print publication date: 2014

Print ISBN-13: 9780199685233

Published to Oxford Scholarship Online: March 2015

DOI: 10.1093/acprof:oso/9780199685233.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 27 November 2021

Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New Member States*

Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New Member States*

Chapter:
(p.147) 6 Does Formal Work Pay? The Role of Labor Taxation and Social Benefit Design in the New Member States*
Source:
Social Insurance, Informality, and Labor Markets
Author(s):

Johannes Koettl

Michael Weber

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199685233.003.0006

The analysis presented in this chapter defines three different synthetic measurements of disincentives for formal work: two standard measurements, namely the tax wedge and the marginal effective tax rate (METR); and a new, innovative measurement called formalization tax rate (FTR). The novelty of the latter is that it measures disincentives stemming not only from labor taxation, but also from benefit withdrawal due to formalization. A descriptive analysis across a large number of OECD and Eastern European countries reveals that the disincentives for formal work—when measured through the FTR—are especially high for low-wage earners. This suggests that formal work might not pay in this segment of the labor market, in particular for the so-called mini-jobs and midi-jobs (low paying part-time work). Another novelty is the chapter’s empirical approach. Using EU-SILC 2008 data and OECD Tax and Benefit data for six Eastern European countries (Bulgaria, Czech Republic, Estonia, Latvia, Poland, and Slovakia), the chapter matches disincentives for formal work to individual observations in a large data set. Applying a probit regression, the analysis finds a significant positive correlation between FTR or METR and the incidence of being informal. In other words, controlling for individual and job characteristics, the higher the FTR or the METR that individuals are facing is, the more likely they are to work informally. The tax wedge, on the other hand, yields a negative correlation. This indicates that the tax wedge is not sufficiently capturing disincentives for formal work. The chapter also conclude that in cross-country analysis, it might be more useful to use the tax wedge that applies to low wage earners as opposed to average wage earners.

Keywords:   tax evasion, informal employment, formalization tax rate

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