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Institutions, informal labor markets, and business cycle volatility

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  • Shapiro, Alan Finkelstein

Abstract

I build a business cycle labor search-and-matching model with informal labor markets, which shows that different dimensions of institutional quality have similar effects on the size of the informal sector, but different effects on the relationship between informality and long-run macroeconomic outcomes and between informality and labor market volatility. For the same change in informal sector size, changes in different proxies for institutional quality have contrasting quantitative implications for the steady state and the volatility of the labor market, despite having similar consequences on other macroeconomic variables. These results highlight the importance of identifying the source behind changes in the size of the informal sector to characterize the link between informality and business cycle dynamics.

Suggested Citation

  • Shapiro, Alan Finkelstein, 2015. "Institutions, informal labor markets, and business cycle volatility," LSE Research Online Documents on Economics 123408, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123408
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    References listed on IDEAS

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    More about this item

    Keywords

    business cycles; informality; labor search;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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