Doctoral Dissertations

Date of Award

8-2020

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Economics

Major Professor

Georg Schaur

Committee Members

Mohammed Mohsin, Scott Gilpatric, Chad Autry

Abstract

In this dissertation I use theory, empirics, and calibration with Vietnamese firm-level data which I obtain from the Statistics General Office of Vietnam to examine the effects of international trade and foreign direct investment on the hiring of informal employment. In the first chapter, I study the effects of export opportunities on the share of informal employment across firms in an environment in which tariffs through demand volume and volatility can affect firms' hiring decisions. I demonstrate that the heterogeneity in productivity is a relevant factor in explaining changes in informality share. It is predicted that access to international trade reduces the incidence of informality if the effects of raising output on the demand for formal workers dominate the increased demand for informal workers due to the greater volatility. Using tariff data on the United States-Vietnam Bilateral Trade Agreement together with the Vietnam Enterprise Surveys, I find that greater export opportunities are significantly related to reductions in relative demand for informal employment, and focusing on cross section variation, more productive firms hire a lower share of informal workers. Larger firms respond less to tariff liberalization, so my findings suggest that access to international markets may be the most effective for smaller exporters to reduce informal employment. The second chapter provides firm-level evidence of the relationship between foreign investment and informal employment. I examine the informality differentials between FDI and domestic firms and the informality spillover effect of FDI in the Vietnamese manufacturing sector. The results indicate that FDI firms not only create more jobs but also reduce informality by creating relatively more formal jobs. Foreign multinationals offer higher wages than domestic firms even after controlling for differences in informality share. The prevalence of foreign direct investment generates a negative spillover effect in terms of informality share in domestic firms within an industry, but increases the informality level of domestic firms within a province. In the third chapter, I analyze the effects of trade liberalization and foreign direct investment on labor informality in a dynamic general equilibrium model. I show that escalating import competition increases the size of the informal sector, inducing a reallocation of workers from the formal sector to informal firms. More specifically, the informal sector grows by 1.5\% in response to a 10\% drop in import tariffs. Alternatively, export opportunities diminish the level of informality, suggesting that a 10\% drop in export tariffs reduces the size of the informal sector by 0.1\%. Comparative advantage in wages motivates agents to reallocate labor between the two sectors. Moreover, the FDI analysis shows that a decline in the size of the formal sector is associated with increases in foreign direct investment. Quantitatively, a 10\% increase in FDI reduces informal output and employment by 2\%. This is because foreign firms bring intense competition that drives out both formal and informal domestic firms, creating a smaller informal labor market. The policy implication is that export and FDI liberalization should be employed to improve labor conditions by reducing the level of informality.

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