Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2010:13: Government Effectiveness and Regional Variation in Informal Employment

Erik Jonasson ()
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Erik Jonasson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: This paper analyses the role of government effectiveness in the determination of informal employment. A theoretical model is developed, in which local governance and worker skill level are assumed to influence the decision of the worker whether to seek employment in the formal or informal sector. The model is assessed empirically using data from Brazil, where almost half of the urban labour force is employed informally. The empirical analysis supports the predictions of the model and suggests that informal employment is lower in regions with better governance and higher average education.

Keywords: informal employment; government effectiveness; Latin America; Brazil

JEL-codes: J21; J24; O17; R23

18 pages, First version: October 26, 2010. Revised: March 31, 2011.

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