Informal Labour and Credit Markets: A Survey

IMF Working Papers, February 1, 2010

Source details

Reviews the literature on the informal economy, focusing on empirical findings and approaches to modeling informality.
Concentrates on labour and credit markets as the markets most affected by informality.
Emphasizes importance in emerging and other developing economies due to high degrees of informal labour and financial services and implications for macroeconomic policy effectiveness.
Argues for the need for dynamic general equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE) models to fully understand costs, benefits and policy implications of informality.
Concludes the literature on informality is "quite patchy" with several unexplored areas left for research.

Informality materially affects labour and credit markets in emerging and developing economies.
High degrees of informal labour and financial services have implications for the effectiveness of macroeconomic policy.

Surveys existing approaches to modeling informality within both partial and general equilibrium environments.
Highlights the need for:
- Dynamic general equilibrium (DGE) models.
- Dynamic stochastic general equilibrium (DSGE) models for a full understanding of informality’s costs, benefits and policy implications.

Policymaking and macroeconomic policy effectiveness must account for the prevalence of informal labour and financial services in emerging and developing economies.
Research and model development should prioritize dynamic equilibrium frameworks (DGE and DSGE) to inform policy trade-offs related to informality.

The literature is described as "quite patchy."
Identifies "several unexplored areas left for research," implying priority for:
- More comprehensive empirical studies on informal labour and credit.
- Development and application of DGE and DSGE models that incorporate informality.