The effect of informality on profit rates: the role of feminization of labor

Abstract

This paper explores the intricate dynamics among the informal economy, profit rates, and the feminization of labor. While extensive literature has delved into the causes and consequences of the informal economy, a notable gap exists in understanding its impact on profit rates—an essential indicator of a capitalist economy’s health. The preference of certain firms to operate informally enables them to reduce costs, enhance competitiveness, and diminish union influence, ultimately boosting profitability. The paper proposes and tests the hypothesis that the informal sector’s presence is linked to higher profit rates. Methodologically, the study introduces a Post-Keynesian model that incorporates gender-specific marginal propensities to consume, followed by a simulation analysis. Subsequently, an econometric model is employed, utilizing data from 127 countries spanning 1991–2018. Results from both simulation and panel data analysis robustly indicate a significant association between the informal sector and increased profit rates. This phenomenon is attributed to the feminization of labor, suggesting a role in cost reduction.