Description

Paraguay’s economy features a high degree of informality. Based on different estimation
 approaches, informal activity represents more than half of total employment in Paraguay, a
 higher rate than those observed in its Latin American and the Caribbean peers. Theoretical
 and empirical considerations support the notion that regulations, enforcement policies, and
 government effectiveness are the ultimate determinants of informality. In all of these areas
 Paraguay performs weakly compared to regional peers. Using household and enterprise
 surveys, we find that Paraguay’s informal sector absorbs the most vulnerable workers but
 affects negatively medium and large firms in the formal sector. DSGE model simulations
 suggest that the optimal combination of policies to reduce informality is not straightforward,
 and needs to reflect the specific circumstances and objectives of the country.

More publications in this series: Working Papers

More publications by: Mauricio Vargas