 Welcome to this afternoon's session on the structural foundations of inequality. I'll present one paper, then Marcelo Slava comes and then finally Hernando Zuleta. All of us are from the Department of Economics here at the University of Los Andes. And this is sponsored by the CDE. So this is the first paper. It is jointly with my co-authors David Montoya, Andres Alvarez, and Hernando Zuleta who will present the third paper. And it's about the COVID crisis and the role of the informal sector both in the crisis and in the recovery. So we know that employment in developing countries has a big component of informality. And informality has two roles. On the one hand, informality makes the income of the workers more fragile to business cycles. So whenever there is a crisis, these informal workers, they cannot resort to the social nets and so it's more difficult for them to smooth consumption on opposite to the formal workers. But although informality has like a bad, it's usually thought as a bad characteristic of the economy, it's also true that informality, the informal labor market is more flexible than the formal one. And therefore it can absorb a part of the destruction of formal jobs after a negative shock. So whenever there is a huge crisis like the COVID one, usually there is a lot of formal employment that gets destroyed and usually people have access to more informal jobs because it's a more flexible market. So that's the idea. In general, informality is a bad thing for the economy. But in the short run, it could work as a cushion to smooth this type of crisis. That's the idea. So that's the usual story on economy crisis. But the COVID crisis is a little bit different. Why? Basically because the informal sector has a higher risk of infection and that has been documented in several studies, but especially in what study that was made here in Los Andes, directed by Rachid Lajash and Raquel LaRectora. She participated also also in Asus Armiento. There were several people participating in this study and they showed that effectively people that work in informal jobs had a higher risk of contagion. So that potentially lead to different consequences when there is informality in this type of crisis. So what we want to do here is to quantify the role of the informal sector, okay? So here first I want to show you a picture. So the title is whether the informal sector was a cushion as I show you, it could happen in normal crisis or it was an amplifier of this crisis. And the answer is both. It was an amplifier of the crisis at the beginning of the pandemic, but then it held as a cushion for the recovery. That's the idea. So here in this graph you could see that the yellow line is the informality, the number of informal workers and the green, blueish line is formality. So you could see that more jobs were lost up from the informal sector than from the formal sector. But then after September, more or less, the informal sector reacted more quickly and it led the recovery from the crisis. That's the idea. So the yellow line is above the blue line at the end of the year. So that's how you could see it could work as an amplifier at the beginning but then it was the usual cushion of the crisis. So we want to understand why this is happening and also we want to understand what policies are more effective to smooth the crisis. That's the idea of the paper. So to answer that, we propose an SIR model that's an epidemiological model where you have a bunch of people that could get infected and some of them unfortunately die and others recover. And we want to see the effect of that epidemiological dynamic in the economy, that's the idea. So we have this epidemiological model that has formal and informal markets. We have agents that derive utility from formal and informal consumption, they substitute, they are imperfectly substitutes and they provide an indivisible unit of labor. So that labor could be used to the formal market, to the formal, for formal employment, for informal employment or they could be unemployed. And each of these agents are born with a productivity. So what is going to happen is that more productive households they go to the formal sectors at the more improductive households they have to choose between unemployment or informality. Here unemployment will look also like inactivity. Now the twist here is that there's the epidemiological block of the model. Here you will have a risk of contagion, a risk of getting the COVID. This risk of contagion is higher the more the agent consumes and the more the agent works. Work, okay? So if I have more transactions with the markets well there is a higher chance that I get infected. But that chance of getting infected is higher when those activities take place in the informal sector. Okay? And then we are going to calibrate those numbers with the study that I just mentioned of that they're directed by sheet. And it's also higher the risk of contagion is also higher the greater the number of infected agents because it's more likely that you will have a transaction with one of these infected agents. That's the idea. We also have a formal firm that is subject to a minimum wage and that has to pay payroll taxes and also has to pay hiring cost. Because it's too costly to hire formal workers they will only hire a high productivity workers. That's the idea. The remaining workers they have to decide whether to be unemployed or having working in the informal sector by their own. Basically they are self employed. Then we calibrate the model to the Columbia to the Colombian and Peruvian economies basically because we want to see the effect of a more flexible market. As I will show you the calibration the Peruvian economy is more flexible in the formal market. And that could help for a quicker recovery. And then we simulate the economic and the epidemiological effect of several policies. Among them is targeted and non-targeted transfers. So basically universal basic income or targeted transfers to the poorest which here would be then employed and the informal workers. General and selected lockdowns. So you could have general lockdowns like we had at the beginning where almost all the economy shut down or we propose some selective lockdowns which are targeted to the informal sector. I know this is difficult. This is kind of saying well the informal sector has to shut down whereas the formal workers they can still work. Well that's difficult to implement but here in Bogota we have something similar by restricting by having lockdowns by neighborhoods. So that's kind of the idea we have behind these selective lockdowns and we will show that that's the best way of doing these lockdowns because you decrease the contagion more effectively and you don't affect that much the economy. And also we want to simulate what happens when you have lower payroll taxes which is the case of the Peruvian economy. So those are the three policies that we want to model. Here is the calibration of the model. So as I told you we have households we have a formal firm, we have the epidemiological block and so when we mix all those blocks we have all these parameters. Basically I want you to pay attention to a few of them. The gamma sub F which is the formal good weight in the consumption aggregator. You could see that it's higher it's 1.2 for Colombia, 0.8 for Peru and it's the opposite for the informal consumption. Basically what we are trying to get here is we want to replicate the idea that the Peruvian households tend to buy goods more in the informal markets. They rely more for example to these markets that we have several of those but one argument is that Peruvians like to eat like more fresh food and that's why they resort to these informal markets. So when you examine the typical consumption bundle in the Peruvian economies well they have much more goods that are bought from the informal markets. So that's what we want to reflect with those numbers. The other number that is interesting is that the hourly minimum wage relative to the median hourly informal wage is higher for the Colombian market, labor market. So here we have a relatively higher minimum wage of the formal sector that has implications for flexibility of the formal market and also we pay much more payroll taxes here in Colombia. So basically this is telling us about the inflexibility of the Colombian labor market. But on the other hand you have more informality on the Peruvian economy. So why does the Peruvian economy why do they have more informality? Basically because they have lower productivity and lower distribution productivity. So even though they have a more flexible labor market well they have more informality and they will have consequences for the infected people. That's what we want. And the rest of the parameter of contagion is exactly the same for both economies. So now what we want to do is to, I'm gonna show you the effects of our model compared to the usual model of the SIR combined with this economic model, macroeconomic models but without having a differential risk between the formal and informal sector. So here basically the blue line is what a usual model will tell you and the black line is what our model will tell you when you have a differential risk between the formal and informal sector. And as you can see in our model people will get more infected. So basically you have in all the models that are applied to the developed countries you will have one risk of contagion and here we have two risk of contagion. One for the formal sector that is lower than the usual one and one for the informal sector that is bigger than the usual one. So basically we are doing a spread here of the risk of contagion. And what you could see is that at the end you will have more infected people and you will have more deceased people. Also what you would see is that households would substitute informal for formal consumption to decrease the risk of contagion in our model. And this substitution generates a bigger dip in the informal sector that generates a bigger dip in total consumption. So here informal sector goes down much more than the formal sector and at the end the aggregate effect is that consumption goes much lower than the usual models. I realize now that I had this here. In terms of employment, what you would see is that informal employment again decreases us at a faster pace than formal employment and that increases overall unemployment. That's the other thing. And when you do the policy experiments I'm gonna here present you a summary because we have a very few time. So we have, this is a basic summary. When you have lump sum transfers so basically universal basic income, do we have that the greater the transfers the less severe the pandemic? So you will have less deceased people but you will have a deeper recession. Now these universal transfers they will encourage formal employment because people will substitute informal for formal consumption because it has a lower risk of contagion. And so formal employment will increase relatively to the informal sector, to the informal employment. But if you target those lump sum transfers the effect on formal employment depends on the size of the transfer. If transfers are the size of what we did here in Colombia and you multiply by two those transfers you will have a lower decrease in formal employment. That's good. But if you keep increasing the amount of transfers the formal employment will start to increase. So it has this non-monotonic effect on formal employment, the amount of transfers when they are targeted to the poorest people which is here in this model to unemployed and informal workers. What happens with the lockdown? Well, a lockdown is useful at the beginning of the pandemic because still contagion is very low and people will still have the usual activity in a model without risk of contagion. So lockdowns are useful to slow down the speed of contagion at the beginning, but in the peak of the pandemic basically with lockdown without lockdown the amount of infected people is exactly the same. So lockdowns are useful at the beginning of the pandemic but the cost of that is that it will hurt her formality permanently. Why? Basically because it will destroy jobs at the beginning much more jobs that we should destroy and then because of the hiring cost of the formal sector well the formal employment will recover very slowly. That's the effect of a general lockdown. On the other hand, a selective lockdown to informal employment would be more efficient in reducing deaths basically because there is a higher risk of contagion there and will encourage formality. So that's a better option. Also the targeted lump sum transfers will be a better option because it's less costly basically. I have a similar effect, a similar epidemiological effect. Now, but what is a lockdown? It's very difficult to have numbers on the lockdown so what we did was to calibrate the lockdown to match the formal employment creation and this number would be different for each month. Why? Because in each month we started to ease the general lockdown after a few months of the pandemic. So we wanted to capture that and we did it and we chose those numbers to replicate the formal employment creation. The model does a good job on replicating the observed epidemiological results and it also replicates quite well the creation of informal employment. These are basically the results that we are having. What happens if you would have a duplicate the transfers? What happens if you had a selective lockdown and not a general lockdown? And in general what you would see is that this would be the third line would be this scenario that we've had effectively here. Why? Because we have a general lockdown and we have long some sorry the fourth line because we have targeted long some transfers and a general lockdown and it would be the fact we cannot replicate aggregate consumption. Consumption is goes down much more than what we have certain real data basically because here households cannot smooth consumption. We don't have assets. That's one thing that we could explore in an expression. But you could see that having twice the amount of transfers would have increased unemployment by a lot. What we observe is that unemployment and inactivity were 34% in the peak of the pandemic. Well, if you had given twice the amount of long some transfers that amount of unemployment and inactivity would have been 58%. So having much more transfers would create a much higher unemployment, a greater but less falling aggregate consumption and less deceased people. So you have the trade-off there. So the idea with the transfer is that you limit the economic activity and that's good because you decrease the number of deaths but you have the economic trade-off because you lose a lot of output. That's the idea. When we compare to the Peruvian economy basically the conclusion here is that a more flexible market are more useful for a faster recovery. That's the basic conclusion. I'm going to end with this slide. So basically what we did here was having, considering a higher risk of contagion for the informal sector. And what we show you is that that generates a deeper recession that if you don't have this spread between formal and informal sector, that flexible formal prices unless distorted labor market is the recession. So that's good because you can have a faster, you can have also a faster recovery. And here in Colombia we have a very inflexible formal market, we could do better then. That long some transfers reduce the labor supply that helps to smooth the pandemic but deepens the recession. If you target them that lowers the cost and has basically the same epidemiological effects, lockdowns are only useful at the beginning. And if you target them to informal sector that reduces output loss and increases the incentives for being a formal worker. So that's basically the summary of the paper. Thank you.