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Firm Heterogeneity, Informal Wage and Good Governance

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  • Kar, Saibal

    (Centre for Studies in Social Sciences, Calcutta)

  • Marjit, Sugata

    (Centre for Studies in Social Sciences, Calcutta)

Abstract

We provide an analysis of enforcement policies applicable to formal sector in dual labor markets. We use a framework with heterogeneous firms, endogenous determination of informal wage and politically dictated enforcement strategies. Firms which operate both in the formal and informal sectors do very little to increase employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcement of labor laws and other regulations should not have aggregate employment effects, particularly when workers are productively homogeneous. For firms operating exclusively in the informal sector, the outcome is different. Such features determine the stringency of enforcement in a market characterized by firms with varying levels of productivity. For example, in case of firms with relatively high levels of productivity, enforcement has to be stricter than in the case with relatively low productivity firms. Taxing the more productive seems to be the optimal strategy.

Suggested Citation

  • Kar, Saibal & Marjit, Sugata, 2011. "Firm Heterogeneity, Informal Wage and Good Governance," IZA Discussion Papers 5978, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp5978
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    References listed on IDEAS

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    1. Marjit, Sugata & Ghosh, Sudeep & Biswas, Amit, 2007. "Informality, corruption and trade reform," European Journal of Political Economy, Elsevier, vol. 23(3), pages 777-789, September.
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    6. Kanbur, Ravi, 2009. "Conceptualising Informality: Regulation and Enforcement," IZA Discussion Papers 4186, Institute of Labor Economics (IZA).
    7. Sugata Marjit & Vivekananda Mukherjee & Martin Kolmar, 2006. "Poverty, taxation and governance," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(3), pages 325-333.
    8. Saul Estrin & Tomasz Mickiewicz, 2012. "Shadow Economy and Entrepreneurial Entry," Review of Development Economics, Wiley Blackwell, vol. 16(4), pages 559-578, November.
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    11. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    12. Sugata Marjit & Saibal Kar & Hamid Beladi, 2007. "Trade Reform and Informal Wages," Review of Development Economics, Wiley Blackwell, vol. 11(2), pages 313-320, May.
    13. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2009. "Revisiting the Informal Sector: A General Equilibrium Approach," MPRA Paper 52135, University Library of Munich, Germany.
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    Cited by:

    1. Saibal Kar & Sarmistha Banerjee, 2022. "Pollution Abatement and Production Outsourcing in India," Journal of Industry, Competition and Trade, Springer, vol. 22(1), pages 83-97, March.
    2. Sugata Marjit & Biswajit Mandal, 2016. "International Trade, Migration and Unemployment – The Role of Informal Sector," Economics and Politics, Wiley Blackwell, vol. 28(1), pages 8-22, March.
    3. Marjit, Sugata & Das, Gouranga G., 2023. "Where have all Tech Layoffs gone? A Model of Two Worker Types with Outsourcing," GLO Discussion Paper Series 1338, Global Labor Organization (GLO).
    4. Sudeshna Mitra & Kausik Gupta, 2017. "Fragmentation, Skill Formation And International Capital Mobility," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 65(02), pages 335-350, March.
    5. Sugata Marjit & Gouranga G. Das, 2023. "Where Have All Tech Layoffs Gone? A Model of Two Worker Types with Outsourcing," CESifo Working Paper Series 10686, CESifo.
    6. Elena Podrecca & Gianpaolo Rossini, 2015. "International Factor Mobility, Wages and Prices," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 683-694, August.
    7. Luz Adriana Florez, 2015. "The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labour Market Policies," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, August.
    8. Saibal Kar, 2016. "Do economic reforms hurt or help the informal labor market?," IZA World of Labor, Institute of Labor Economics (IZA), pages 263-263, June.
    9. Marjit, Sugata & Mishra, Suryaprakash & Mitra, Sandip, 2021. "Tax evasion by tax deferment: Sham litigation with an informal credit market," European Journal of Political Economy, Elsevier, vol. 69(C).
    10. Dutta, Nabamita & Kar, Saibal & Stivers, Adam, 2023. "Does Economic Freedom Moderate Perceived Corruption for Firms in India?," IZA Discussion Papers 16484, Institute of Labor Economics (IZA).
    11. Saibal Kar & Meghna Dutta, 2018. "Outsourcing and Productivity During Economic Crisis: Evidence from Indian Manufacturing Firms," Arthaniti: Journal of Economic Theory and Practice, , vol. 17(2), pages 168-182, December.
    12. Beladi, Hamid & Dutta, Meghna & Kar, Saibal, 2016. "FDI and Business Internationalization of the Unorganized Sector: Evidence from Indian Manufacturing," World Development, Elsevier, vol. 83(C), pages 340-349.
    13. Beladi Hamid & Oladi Reza, 2017. "Technology Diffusion and Trade Liberalization," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(2), pages 1-15, April.
    14. Mandal, Biswajit, 2009. "Would Recession Induce More Intermediation in the Corrupt Informal Sector?," MPRA Paper 19930, University Library of Munich, Germany, revised 10 Jan 2010.

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    More about this item

    Keywords

    wage; informal labor; heterogeneous firms; labor regulations; enforcement;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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