Autore
Bonatti, Luigi

Titolo
The impact of social security tax on the size of the informal economy
Periodico
Università degli studi di Trento. Dipartimento di Economia. Discussion papers
Anno: 1998 - Fascicolo: 12 - Pagina iniziale: 1 - Pagina finale: 17

The paper studies the distortions that social security tax may induce in the occupational composition of the economy by encouraging firms operating in the informal economy to flourish. These firms are less efficient technologically, but they are more able to evade mandatory contributions to the pay-as-you-go pension system (PA YG). As the rate of return on gare assets is higher than the rate of growth of the economy (to which the implicit rate of return on the contributions is linked), it is more convenient for workers (other things being equal) to stay out of the P A YG: in these circumstances, the incidence of the informal economy on total employment increases with the social security tax. This has a positive impact on capital accumulation, since the workers in the informal economy, not being covered by public pensions, tend to save more. The increased capital accumulation allows firms of the formal economy to use more capital intense techniques and to bear the higher (gross) labor cost necessary to keep attracting workers. In spite of its positive impact on the capital stock, a higher social security tax tends to be detrimental in the long run to the lifetime welfare of households, since it diverts capital and labor from the more efficient technologies of the formal economy into an informal economy characterized by lower productivity.




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