Informal Labour and Credit Markets: A Survey.

Informal Labour and Credit Markets: A Survey *

Nicoletta Batini

IMF and University of Surrey

Young-Bae Kim Paul Levine Emanuela Lotti
University of Surrey

October 22, 2009

Abstract

This paper reviews the literature on the informal economy, focusing first on em-
pirical findings and then on existing approaches to modelling informality within both
partial and general equilibrium environments. We concentrate on labour and credit
markets, since these tend to be most affected by informality. The phenomenon is
particularly important in emerging and other developing economies, given their high
degrees of informal labour and financial services and the implications these have for the
effectiveness of macroeconomic policy. We emphasize the need for dynamic general
equilibrium (DGE) and ultimately dynamic stochastic general equilibrium (DSGE)
models for a full understanding of the costs, benefits and policy implications of infor-
mality. The survey shows that the literature on informality is quite patchy, and that
there are several unexplored areas left for research.

JEL Classification: J65, E24, E26, E32

Keywords: Informal economy, labour market, search-matching models

* An earlier version of the paper was presented at an IMF APD Seminar, 22 April 2009. We acknowledge
financial support for this research from the Foreign Commonwealth Office as a contribution to the project
“Building Capacity and Consensus for Monetary and Financial Reform” led by the National Institute of
Finance and Public Policy (NIPFP), New Delhi. We are indebted to Subrata Ghatak for helpful comments.

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