Impact of improved productivity in the informal sector

This paper analyzes the influence of the informal sector on the Senegalese economy. A two-sector DSGE model is used for the simulations. Deterministic and random shocks to informal sector productivity are simulated. The results showed that following a 5% annual increase in informal sector productivity over 10 years aggregate output would rise by an average of 2% that of the informal sector would increase by 4.9% while that of the formal sector would be virtually unaffected. The impact on the economy''s productivity would be positive given the preponderance of the informal sector. The result would be an increase in final household consumption and a fall in the general price level. The results of the random shock simulations showed that consumer prices would be more sensitive to productivity improvements in the informal sector and would respond instantaneously to shocks reaching a maximum drop of 12.27%. In addition all other aggregates would have responded significantly to shocks.