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Exclusive Goods and Formal-Sector Employment

Author

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  • Reto Foellmi
  • Josef Zweimüller

Abstract

We explore how the underemployment problem of less-developed economies is related to income inequality. Consumers have nonhomothetic preferences over differentiated products of formal-sector goods and thus inequality affects the composition of aggregate demand via the price-setting behavior of firms. We find that high inequality divides the formal sector into mass producers and exclusive producers (which serve only the rich); high inequality generates an equilibrium where many workers are crowded into the informal economy; and an increase in subsistence productivity raises the unskilled workers' wages and boosts employment due to the higher purchasing power of poorer households. (JEL D31, D43, E24, E26, J24)

Suggested Citation

  • Reto Foellmi & Josef Zweimüller, 2011. "Exclusive Goods and Formal-Sector Employment," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 242-272, January.
    • Handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:242-72
    Note: DOI: 10.1257/mac.3.1.242
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    References listed on IDEAS

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    Cited by:

    1. Aziz N. Berdiev & James W. Saunoris, 2019. "On the Relationship Between Income Inequality and the Shadow Economy," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 45(2), pages 224-249, April.
    2. Botero-García, Jesús Alonso, 2012. "Desempleo e informalidad en Colombia : un análisis de equilibrio general computable," Chapters, in: Arango-Thomas, Luis Eduardo & Hamann-Salcedo, Franz Alonso (ed.), El mercado de trabajo en Colombia : hechos, tendencias e instituciones, chapter 19, pages 795-839, Banco de la Republica de Colombia.
    3. Chandril Bhattacharyya & Dibyendu Maiti, 2023. "Informal Sector, Innovation and Growth," Working papers 334, Centre for Development Economics, Delhi School of Economics.
    4. Grigoryan, Aleksandr, 2011. "Interaction between monetary policy and income inequality in a deposits market," MPRA Paper 43555, University Library of Munich, Germany, revised 2012.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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