The informal sector and tax on employment: A dynamic general equilibrium investigation

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Saracoglu D. S.

JOURNAL OF ECONOMIC DYNAMICS & CONTROL, vol.32, no.2, pp.529-549, 2008 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 32 Issue: 2
  • Publication Date: 2008
  • Doi Number: 10.1016/j.jedc.2007.01.035
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.529-549
  • Keywords: informal sector, economic growth, Engel effects, employment tax, Turkey, MODEL, COUNTRIES, ECONOMICS
  • Middle East Technical University Affiliated: Yes


This paper elaborates on the evolution of the informal sector vis-a-vis the evolution of agricultural and formal sectors in a developing country economy in process of growth. The analytical contribution of this essay extends the Ramsey theory of growth into a framework that includes an informal sector and household preferences that display Engel effects in agricultural and in informally produced goods. Besides showing that the informal sector's importance diminishes over time as the country's economy grows, the results from the model demonstrate that a country can successfully reduce its informal employment by reducing tax on employment in the formal sector. (c) 2007 Elsevier B.V. All rights reserved.