Productivity and Informality

By Arturo Antón
CIDE
Ministerial Meeting “Productivity and Inclusive Growth”
Santiago de Chile, December 6, 2016
 Overview
• Poor performance of GDP per capita in the region is mostly
due to low productivity (Cole et al., 2005; Restuccia, 2013)
• Large productivity differences across plants
• Social insurance (SI) coverage is limited in several Latin
American (LA) countries
• Large differences in SI for workers across establishments
• This suggests that heterogeneity across plants matters for
both productivity and informality
• In this presentation I examine:
• Productivity and establishment size
• Distortions, establishment size and informality
 Productivity and
Establishment Size
Productivity increases with establishment size

Source: Pagés et al. (2010).

 The vast majority of establishments in LA are small

Distribution of establishments and employment in the manufacturing sector

as a function of establishment size (%)
Establishment size Bolivia (1992) El Salvador (2005) Mexico (2004) US (2005)
(workers) Establishments Employment Establishments Employment Establishments Employment Establishments Employment
1 to 9 91.7 43.6 82.0 17.7 90.5 22.7 54.5 4.2
10 to 19 4.2 10.0 8.3 6.2 4.2 5.5 14.5 4.8
20 to 49 2.6 13.6 3.9 6.2 2.7 8.0 14.7 11.0
50 - 99 0.8 9.8 2.8 10.2 1.1 7.5 7.4 12.3
100 or more 0.6 23.0 2.9 59.7 1.6 56.3 8.9 67.7
Source: Pagés et al. (2010).
Positive correlation between average
establishment size and GDP per capita

Source: Hopenhayn (2016).

A matter of time? Establishments do not seem to grow
after 20-25 years in developing countries
Plant employment by age in the cross-section

Source: Hsieh and Klenow (2014).

Distortions and productivity are positively correlated
(“correlated distortions”)
Distortions vs. productivity in the cross section

Source: Hsieh and Klenow (2014).

A large dispersion in distortions suggests large potential
gains in TFP (Hsieh and Klenow, 2009)
Dispersion in
revenue productivity
(p90 - p10)
Sample: 10 or more workers
Venezuela (2001) 26.6
Colombia (1998) 18.2
Uruguay (2005) 11.8
Mexico (2004) 8.0
Bolivia (2001) 7.8
Chile (2006) 5.9
Argentina (2002) 4.8
Ecuador (2005) 4.4
El Salvador (2005) 4.0

Sample: All workers

El Salvador (2004) 3.9
México (2004) 9.7
US (1997) 3.3
Source: own based on Busso et al. (2012).
Distortions, Establishment
Size and Informality
Correlated distortions: Institutional environment
Micro Survey Sample Enterprise Survey sample
Informal Formal Small Medium Big
Share of tax liability evaded by
"typical" firm 67.7 54.2 44.4 33.7 32.5
Share of management's time spent
dealing with government regulations 1.5 4.2 8.2 9.3 10.5
Source: La Porta and Shleifer (2008).

• Smaller firms evade more taxes than larger firms

• Larger firms spend more time dealing with government
regulations
Correlated distortions: Business income tax in Mexico
• Up until 2013, there was a special tax regime for (unincorporated)
small business
• Requirement: annual sales should not be greater than US$100,000
• If annual sales are above than US$100,000, the taxpayer is
excluded from this regime forever and forced to pay a higher
marginal tax rate
• Income tax rate: 2% over sales
• Evasion rate: 96% (2010)
• Corporate income tax rate: 30% (2013)
• Evasion rate: 24% (2010)
 G U AT E MA LA 71.5

ME XIC O 62.1

Source: SEDLAC.
PA R A G U AY 62.0

B OLIVIA 61.4

N IC A R A G U A 59.6

E L SA LVA DOR 52.5

PE R U 52.3

E C U A DOR 41.9
2014

C OLOMB IA 38.0

A R G E N T IN A 33.6

C OSTA R IC A 28.1

B R A ZIL 22.8

DOMIN IC A N
22.6
R E P.
SHARE OF WORKERS WITH NO RIGHT TO A PENSION,

C HILE 15.5

U R U G U AY 12.5
Labor informality is large in many Latin American countries
There is a negative correlation between labor
informality and establishment size

Establishment size and labor formality in Mexico, 2013

(percentages)
Establishment size
Formal Informal Total
(workers)
1 to 5 3.5 59.9 63.5
6 to 10 3.2 3.5 6.7
11 or more 25.3 4.6 29.9
Total 32.0 68.0 100.0
Source: National Survey of Occupation and Employment.
 Negative correlation between labor informality and
GDP per capita
90
GDP per capita and labor informality in LA, 2000 - 2004
80

70
Labor informality (%)

60

50

40

30

20

10

0
0 2000 4000 6000 8000 10000 12000 14000
GDP per capita

Source: own, based on SEDLAC and World Bank.

 Conclusions
and Policy Implications
 Conclusions
• Heterogeneity across establishments matters for both
productivity and formality
• Suggestive evidence of large differences in distortions
across establishments in Latin America
• A decrease in the heterogeneity of such distortions could
reshape the size distribution of firms towards larger
establishments
• This could increase productivity and formality simultaneously
 Policy implications
• Our knowledge about the specifics of such distortions and its
relative importance is imperfect
• This calls for a better understanding of particular policies and
institutions across establishments
• Not aware of such studies in Latin America using a common framework
• In terms of taxation, both statutory and effective tax rates are
important to understand the heterogeneity in distortions across
plants
• A weak environment for tax enforcement and the rule of law
might also contribute to exacerbate current distortions