Short, long and spatial dynamics of informal employment

This paper analyses regional shadow labour markets. Cross-regional migration flows are introduced in a stochastic two-sector model used to study the effects of regional interactions on informality. Empirical results show that informal activities across Italian regions are driven by the inefficient provision of public goods and high taxes. Regional connections are found to be significant. Place-specific reactions of informal employment to national shocks in the official economy are investigated, finding that the informal sector can act as a complement to or a substitute for formal activities. The summary of the results and policy conclusions are then discussed.