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The Effects of Labor Market Policies in an Economy with an Informal Sector

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Author Info
James Albrecht
Lucas Navarro
Susan Vroman () (Department of Economics, Georgetown University)

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Abstract

In many economies, there is substantial economic activity in the informal labor market, beyond the reach of government policy. Labor market policies, which by definition apply only to the formal-sector can have important spillover effects on the informal sector. The relative sizes of the informal and formal sectors adjust, the skill composition of the workforce in the two sectors changes, etc. In this paper, we build an equilibrium search and matching model to analyze the effects of labor market policies in an economy with an informal sector. Our model extends Mortensen and Pissarides (1994) by allowing for ex ante worker heterogeneity with respect to formal-sector productivity. We analyze the effects of labor market policy on informal- and formal-sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, our model allows us to examine the distributional implications of labor market policy; specifically, we analyze how labor market policy affects the distributions of wages and productivities across formal-sector matches. Classification-JEL Codes: E26, J64, J65, O17

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~06-06-06.

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Handle: RePEc:geo:guwopa:gueconwpa~06-06-06

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Keywords: search; matching; informal sector;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gong, Xiaodong & Van Soest, Arthur & Villagomez, Elizabeth, 2004. "Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," Economic Development and Cultural Change, University of Chicago Press, vol. 53(1), pages 1-36, October.
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  2. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December. [Downloadable!] (restricted)
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  3. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October. [Downloadable!] (restricted)
  4. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Kolm, Ann-Sofie & Larsen, Birthe, 2002. "Social norm, the informal sector and unemployment," Working Papers 04-2002, Copenhagen Business School, Department of Economics. [Downloadable!]
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  6. Kugler, Adriana & Kugler, Maurice, 2003. "The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," IZA Discussion Papers 852, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Kolm, Ann-Sofie & Larsen, Birthe, 2004. "Does tax evasion affect unemployment and educational choice?," Working Paper Series 2004:4, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
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  8. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Satchi, Mathan & Temple, Jonathan, 2006. "Growth and Labour Markets in Developing Countries," CEPR Discussion Papers 5515, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Dolado, Juan J. & Jansen, Marcel & Jimeno, Juan Francisco, 2005. "Dual Employment Protection Legislation: A Framework for Analysis," CEPR Discussion Papers 5033, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Douglas Gollin & Stephen L. Parente & Richard Rogerson, 2004. "Farm Work, Home Work, and International Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 827-850, October. [Downloadable!] (restricted)
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  12. Juan J. Dolado & Marcel Jansen & Juan F. Jimeno, 2007. "A Positive Analysis of Targeted Employment Protection Legislation," IZA Discussion Papers 2679, Institute for the Study of Labor (IZA). [Downloadable!]
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  13. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier. [Downloadable!] (restricted)
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  14. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  15. Gong, Xiaodong & van Soest, Arthur, 2002. "Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico," Labour Economics, Elsevier, vol. 9(4), pages 513-529, September. [Downloadable!] (restricted)
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  16. Pratap, Sangeeta & Quintin, Erwan, 2006. "Are labor markets segmented in developing countries? A semiparametric approach," European Economic Review, Elsevier, vol. 50(7), pages 1817-1841, October. [Downloadable!] (restricted)
  17. Zenou, Yves, 2008. "Job search and mobility in developing countries. Theory and policy implications," Journal of Development Economics, Elsevier, vol. 86(2), pages 336-355, June. [Downloadable!] (restricted)
  18. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, Oxford University Press, vol. 13(2), pages 275-302, May.
  19. Galiani, Sebastian & Hopenhayn, Hugo A., 2003. "Duration and risk of unemployment in Argentina," Journal of Development Economics, Elsevier, vol. 71(1), pages 199-212, June. [Downloadable!] (restricted)
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  20. Stephen L. Parente & Richard Rogerson & Randall Wright, 2000. "Homework in Development Economics: Household Production and the Wealth of Nations," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 680-687, August. [Downloadable!] (restricted)
  21. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July. [Downloadable!] (restricted)
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  22. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  23. Yusufcan Masatlioglu & Jamele Rigolini, 2008. "Informality Traps," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 8(1), pages 2055-2055. [Downloadable!] (restricted)
  24. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January. [Downloadable!] (restricted)
  25. Adriana Kugler & Maurice Kugler, 2008. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," NBER Working Papers 13855, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mariano Bosch, 2006. "Job Creation and Job Destruction in the Presence of Informal Labour Markets," CEP Discussion Papers dp0761, Centre for Economic Performance, LSE. [Downloadable!]
  2. Rita Almeida & Pedro Carneiro, 2007. "Inequality and Employment in a Dual Economy: Enforcement of Labor Regulation in Brazil," IZA Discussion Papers 3094, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Carmen Pagés & Marco Stampini, 2007. "No Education, No Good Jobs? Evidence on the Relationship between Education and Labor Market Segmentation," IZA Discussion Papers 3187, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Bosch, Mariano & Maloney, William F., 2008. "Cyclical Movements in Unemployment and Informality in Developing Countries," IZA Discussion Papers 3514, Institute for the Study of Labor (IZA). [Downloadable!]
  5. Maurizio Bovi & Peter Claeys, 2008. "Treasury V Dodgers. A Tale of Fiscal Consolidation and Tax Evasion," ISAE Working Papers 93 Classification-JEL E62, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
  6. Mathan Satchi & Jonathan Temple, 2009. "Labor Markets and Productivity in Developing Countries," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(1), pages 183-204, January. [Downloadable!] (restricted)
    Other versions:
  7. Bosch, Mariano & Maloney, William, 2008. "Cyclical movements in unemployment and informality in developing countries," Policy Research Working Paper Series 4648, The World Bank. [Downloadable!]
  8. Carmen Pagés-Serra & Marco Stampini, 2007. "¿Sin formación no hay buenos empleos? Elementos de juicio sobre la relación entre la formación y la segmentación del mercado laboral," RES Working Papers 4562, Inter-American Development Bank, Research Department. [Downloadable!]
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