The Effect of Informal Employment and Corruption on Income Levels in Brazil

Produced by: 
West Virginia University
Available from: 
August 2014
Paper author(s): 
Jamie Bologna
Topic: 
Labor
Macroeconomics - Economic growth - Monetary Policy
Fiscal Policy - Public and Welfare Economics
Year: 
2014

This paper exploits a unique dataset on corruption and informal sector employment in 476 Brazilian municipalities to estimate whether corruption impacts GDP or income levels once variation in informal economic activity is taken into account. Overall, I find that higher levels of corruption and a larger informal economy are generally associated with poor economic outcomes. However, only the size of the informal economy has a statistically significant effect.

This effect is robust to the inclusion of a variety of controls and fixed effects, as well as an instrumental variable analysis. Further, these effects are large in magnitude. For example, a one standard deviation increase in the share of total employees that are informally employed explainsa decrease in GDP per-capita of about 18 percent.

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