Working and Saving Informally: The Link between Labor Market Informality and Financial Exclusion

Mer, 14/12/2022 - 12:00 / 13:00

207, Viale Romania

Speaker: Luca Flabbi , University of North Carolina - Chapel Hill

Authors: Luca Flabbi (University of North Carolina - Chapel Hill) and Mauricio Tejada (Universidad Alberto Hurtado, Santiago Chile)

Abstract

The high level of informality and the low level of savings observed in developing countries are fundamentally linked because informal workers have limited access to formal financial institutions. We theoretically study and empirically quantify this link by developing and estimating a labor market model where workers can be employed both formally and informally and can save through both formal and informal financial institutions. We estimate the model on nationally representative data for Colombia and use the estimated model to simulate counterfactual experiments. Results show that reaching full financial inclusion of informal workers will increase their saving rate by 10 percentage points and the overall saving rate by 7 percentage points. Achieving the same saving rate increase using only labor market policies would require a huge reduction in the proportion of informal wage offers. Full financial inclusion would also decrease inequality both in consumption and in formal assets.