The impact of inequality on the informal economy in Latin America and Caribbean with a MIMIC model

Informality is a major issue in Latin America and the Caribbean (LAC). The literature estimating its size has been primarily limited to worldwide models applied to the region. This paper proposes a Multiple Indicators Multiple Causes (MIMIC) model using a data set composed of 41 countries in LAC. The model introduces income inequality and total factor productivity in addition to traditional variables. The results indicate that income inequality is a key determinant of IE, both in terms of statistical significance and measurement. Compared to a model using data from 188 countries, some causal variables have an impact ten times greater on the level of informality, highlighting the importance of tailor-made data set selection when modeling IE with MIMIC.