This article analyzes the interaction between changes in tariff protection, informality, inequality and aggregate income. First, we describe some new empirical evidence on informality, the formal/informal wage gap and trade openness in Latin American countries. Then we present a simple model characterized by three (empirically based) assumptions: (1) agents consume both formal and informal goods; (2) the government uses tariff revenues to purchase formal goods; (3) informality is a voluntary phenomenon. The model predicts that tariff reduction increases informality and wage inequality and that the maximization of income requires a positive level of tariff protection. The model’s results are shown to be consistent with the empirical evidence concerning Latin American countries.

Informality, Tariffs and Wealth

DI MAIO, Michele
2011

Abstract

This article analyzes the interaction between changes in tariff protection, informality, inequality and aggregate income. First, we describe some new empirical evidence on informality, the formal/informal wage gap and trade openness in Latin American countries. Then we present a simple model characterized by three (empirically based) assumptions: (1) agents consume both formal and informal goods; (2) the government uses tariff revenues to purchase formal goods; (3) informality is a voluntary phenomenon. The model predicts that tariff reduction increases informality and wage inequality and that the maximization of income requires a positive level of tariff protection. The model’s results are shown to be consistent with the empirical evidence concerning Latin American countries.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11367/16851
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