Informality and structural transformation

Abstract

In this paper, we investigate the evolution of the informal sector through structural transformation. Wedevelop both a three-sector and aŞve-sector dynamic general equilibrium (DGE) model, which cansimultaneously account for structural transformation between agriculture, industry and services, andbetween the informal and formal sectors. First, we incorporate the informal sector into an otherwisetwo-sector (agriculture and non agriculture) DGE model. Then, we augment this model and build aŞvesector DGE model extending the non-agricultural sector into industry and services, to separately accountfor the evolution of informality in these two sectors. The calibrated model performs remarkably well inaccounting for the evolution of the sectoral employment shares and the size of the informal sector.Finally, we use panel data econometric tools to investigate the empirical relationship between structuraltransformation and the informal sector andŞnd a strong negative relationship between the size of nonagricultural sector and informality.© 2017 Central Bank of The Republic of Turkey. Production and hosting by Elsevier B.V. This is an openaccess article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/)