The master’s thesis produced by João Henrique Reis Menegotto, a student at Fundação Getulio Vargas’ Brazilian School of Economics and Finance (FGV EPGE), under the supervision of Professor Carlos E. da Costa, analyzed the informal economy’s impact on employability in Brazil. The study, titled “Redistributive Taxation and Informality with Labor Market Frictions,” offers a detailed view of how informality affects the labor market and proposes a taxation scheme that seeks to optimize income redistribution by taking these specific characteristics into account.

Here are some of the main findings of Menegotto’s research:

• Burden of Informality: The presence of the informal sector results in a higher level of structural unemployment when compared to a formal economy.
• Unemployment and Productivity: The workers most negatively affected by informality are those who are the least productive.
• Transfers: In the presence of informality, it is optimal to have less progressive taxation and smaller transfers to less productive agents.

The model used by Menegotto is calibrated specifically for the Brazilian economy, segmenting the labor market by productivity. In this context, companies and workers are deemed to negotiate wages through “Nash bargaining.” The study’s methodology involved analyzing optimal non-linear taxation and its macroeconomic implications, and the model was calibrated to reflect the reality of the Brazilian labor market. The research compared an economy with a single formal sector to one that includes an informal sector, highlighting the differences in terms of unemployment and economic efficiency.

Menegotto’s research makes important contributions to the formulation of public policies in Brazil. Its counterfactuals include the implementation of taxation policies that take into account the complexity of the informal labor market and promotion of the formalization of work as a means of reducing structural unemployment. In addition, the study offers valuable insights into how adjusting the taxation and regulation of the informal sector can improve employability and economic stability.

João Henrique Reis Menegotto’s thesis contributes to understanding of the dynamics of the Brazilian labor market and to the development of policies that can promote a fairer and more inclusive economy.

To read the full thesis, click here.

To find out more about FGV EPGE, click here.