Rethinking the informal labour from an evolutionary point of view

The model presents the dynamics and the equilibrium of an overlapping generation economy when there is informal employment, a pension system and altruistic agents. The model inspires from stylised facts on developing and Euro-Mediteranean countries where family plays a central role in risk insurance. The rational is emphasised by lower costs compared to private and public insurance systems. Given an initial distribution of the informally employed individuals, the model captures the effects of social security decisions and anticipated bequests on the preference of the agents for formal or informal employment. The impact of fiscal policies on the distribution of employment to formal and informal categories is analysed through the political competition. We show that opportunist behaviour would amplify the relative size of the informal employment.

► We have defined the stability of an economy populated by informal and formal agents.
► An economy populated with only formal workers is not stable, social network providing support in retirement will always create an incentive for being informal.
► We have defined the relationship between informality and tax rate.
► The political competition contributes to informalisation.
► If agents are risk neutral, the stability is ensured if the relative wage rate is greater than a threshold level.