Education and informality: what welfare effects are at stake?

Although the wage distribution is central to analysing inequality issues, the provision of public services destined for t he poor can make an essential difference in evaluating inequality in welfare rather than in income. Whereas raising taxes to fund public services would lead to a distributional conflict along with an efficiency loss, lower informality levels as a source of government revenue would make everyone better off. The simulation results suggest that, given the important size of the informal sector in developing countries, government intervention to reduce informality has great potential as an efficient redistributional tool.