Here is a question by my Econ professor: a woman is selling tacos and burritos a
ID: 1182076 • Letter: H
Question
Here is a question by my Econ professor: a woman is selling tacos and burritos as well as drinks out of the back of her truck near the marina in Cabo San Lucas, Mexico. The construction workers pay her a small fee to bring them a hot lunch and a cold drink. In many parts of the world this is very common work and gender roles for women and men. This type of work is considered by economists as informal labor market activity and difficult to accurately capture in GDP. Please answer the following: What are some of the issues facing policymakers when counting her activities in GDP? Brainstorm some ideas for how you would solve the problem of including her efforts.Explanation / Answer
The informal economy refers to activities and income that are partially or fully outside government regulation, taxation, and observation. The main attraction of the undeclared economy is financial. This type of activity allows employers, paid employees, and the self-employed to increase their take-home earnings or reduce their costs by evading taxation and social contributions. On the one hand, informal employment can provide a cushion for workers who cannot find a job in the formal sector. But, on the other hand, it entails a loss in budget revenues by reducing taxes and social security contributions paid and therefore the availability of funds to improve infrastructure and other public goods and services. It invariably leads to a high tax burden on registered labor. A high level of informality also can undermine the rule of law and governance. The fact that a large share of the population is openly ignoring laws, regulations and taxes can weaken the respect citizens have for the state. The informal sector is a pervasive and persistent economic feature of most developing economies, contributing significantly to employment creation, production, and income generation. Recent estimates of the size of the informal sector in developing countries in terms of its share of non-agricultural employment range roughly between one-fifth and four-fifths. In terms of its contribution to GDP, the informal sector accounts for between 25% and 40% of annual output in developing countries in Asia and Africa. There are various reasons why governments may be concerned about large informal sectors. These include potentially negative consequences for competitiveness and growth, incomplete coverage of formal social programs, undermining social cohesion and law and order, and fiscal losses due to undeclared economic activity. For most governments, these concerns outweigh any advantages that the informal sector offers as a source of job creation and as a safety net for the poor.