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A fully financed increase in the punishment of the informal sector then induces ψ l to increase both because p α increases and because z falls.
A fully financed increase in the relative punishment of the informal sector, ψ l, will reallocate search intensity and employment towards the formal sector, i.e. ({sigma _{l}^{I}}) falls, ({n_{l}^{F}}) increases, and ({n_{l}^{I}}) falls.
We have the following results: A fully financed increase in the relative punishment of the informal sector, ψ l, will always cause the official unemployment rate (({u_{l}^{o}})) to fall, whereas the actual unemployment rate (u l ) increases if (left ({y_{l}^{F}}/{y_{l}^{I}}right psi _{l}>1) (falls if (left ({y_{l}^{F}}/{y_{l}^{I}}right psi _{l}<1)).
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CEO of Professional Science Editing for Scientists @ prosciediting.com