B1 - [Farias & Rocha 2021] - Formality Costs, Registration and Development of Microentrepreneurs: Evidence from Brazil

 

ANALYSIS OF ARTICLE

The Article main merit is to provide an empirical study corroborating with the literature that indicates that rate of formality firms increases if registration costs, and taxes reduce. It also indicates that formalization has no effect on their TFP.

The Authors analyze the effects of the implementation of the MEI Program in Brazil (MEI = Individual Microentrepreneur) from its establishment in 2009 till 2015. Six million new firms were formalized during such period, and the authors try to demonstrate that the effect is net of other possible movements on formal / informal labor forces. New data from 2021 shows that now 11M MEIs are registered since 2009, and 90% of those firms are active.

Phenomena is based on the low registration and tax costs, with microentrepreneurs choosing to formalize their situation as they can be part of the safety net (with some limited benefits), as well as being out of illegality as well as able to take credit lines and formally invoice Customers.

 

 

SUMMARY OF ARTICLE (provides an overview of the Article, with copy & paste of contents, aiming to summarize its contents).

Authors propose to analyze the effect of Brazil’s Individual Microentrepreneur program (MEI) established in July 2009 on informality, assessing:

1-      Firm registration – increases in 160% and quantity of firms increased 60% by Dec-2015. Total of 7M firms got registered. Reduction of registration cost was important for firm entry.

2-      Subsequent firm growth – using a panel data with firm size and wage bills, authors find that these firms do not grow. Moreover, they show that formal and informal microentrepreneurs converge in earnings after the program implementation.

Data includes all microentrepreneurs that registered to the program, following their formal labor market employment and their growth even when they open new firms. Moreover, they combine such data with PNAD research on informality.

 

Section 2 (Institutional Setting) – Explains the MEI program, eligibility, reductions in costs, etc.

 Section 3 (Data) – Authors use 5 databases:

1. CNPJ database – including an identifier for MEI and the CPF of the firm owner
2. PNAD – data on formal and informal workers.
3. MEI profile by SEBRAE – results of random phone interviews with question on the MEI activities to get descriptions on why to formalize and credit market access
4. RAIS – authors use it to profile MEI owners by their CPF to get labor market history before and after registering the firm
5. CNE (Cadastro Nacional de Empresas) – used to evaluate the growth of MEIs.

Section 4 (Impacts) – Explains the MEI program, eligibility, reductions in costs, etc.

They use a monthly panel to track ins and outs of the formal sector, where Beta is the ATT.

Authors use Difference-in-Differences to measure the effect on firm registrations, and they demonstrate a surge of registrations from July-2009, when the program started.

 

Section 5 (Results) – using PNAD data, authors provide a picture of the MEIs:

• ·       MEIs are usually women, non-white and young. Maternity paid leave may be one factor
• ·         High school complete.
• ·         Work from home (only 30% with an office)
• ·         Reasons to get formal: access to credit, issue invoice and leave illegality
• ·         90% of MEIs declare themselves as active companies
• ·         Lower revenue quartile firms tend not to formalize. Higher revenue quartile tends to formalize

Authors also show that there’s no earning gap between formal and informal with the MEI program. They also got firm indication that MEI’s TFP does not change with formalization.