IDEAS home Printed from https://ideas.repec.org/p/lvl/lacicr/1043.html
   My bibliography  Save this paper

Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies

Author

Listed:
  • Olivier Charlot
  • Franck Malherbet
  • Cristina Terra

Abstract

This paper studies the impact of product and labor market regulations on the number and size of firms in the formal and informal sectors, as well as on relative wages, relative size of the two sectors and overall unemployment. We show that entry costs in the formal sector tend to make informal firms smaller and more numerous than informal firms, i.e., such costs render the informal sector relatively more competitive. Furthermore, it is possible to reduce informality without increasing unemployment or reducing workers’ wage by reducing entry costs in the formal sector rather than reducing labor market regulations. We also highlight a number of externalities stemming from labor and product market imperfections, allowing the size of those distortions to differ across sectors. We show that, while the so-called overhiring externality takes place in both sectors, this translates into a smaller relative size of the informal sector.

Suggested Citation

  • Olivier Charlot & Franck Malherbet & Cristina Terra, 2010. "Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies," Cahiers de recherche 1043, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1043
    as

    Download full text from publisher

    File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-43.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bosch, Mariano & Goni, Edwin & Maloney, William, 2007. "The determinants of rising informality in Brazil : Evidence from gross worker flows," Policy Research Working Paper Series 4375, The World Bank.
    2. Gustavo Gonzaga, 2003. "Labor Turnover and Labor Legislation in Brazil," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2003), pages 165-222, August.
    3. Pierre Cahuc & Francois Marque & Etienne Wasmer, 2008. "A Theory Of Wages And Labor Demand With Intra-Firm Bargaining And Matching Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 943-972, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Daniel Baksa & Zsuzsa Munkacsi, 2016. "Aging, (Pension) Reforms and the Shadow Economy in Southern Europe," Bank of Lithuania Working Paper Series 32, Bank of Lithuania.
    2. Adams, Abass & Cantah, William Godfred & Wiafe, Emmanuel Agyapong, 2014. "Income Insecurity, Job Insecurity and the Drift towards Self-employment in SSA," MPRA Paper 59615, University Library of Munich, Germany.
    3. Olivier Charlot & Franck Malherbet & Mustafa Ulus, 2016. "Unemployment Compensation and the Allocation of Labor in Developing Countries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(3), pages 385-416, June.
    4. Therese REBIERE, 2011. "Informal labor market and access to education in developing economies," EcoMod2011 2861, EcoMod.
    5. Azunre, Gideon Abagna & Amponsah, Owusu & Takyi, Stephen Appiah & Mensah, Henry & Braimah, Imoro, 2022. "Urban informalities in sub-Saharan Africa (SSA): A solution for or barrier against sustainable city development," World Development, Elsevier, vol. 152(C).
    6. Arnab K. Basu & Nancy H. Chau & Ravi Kanbur, 2015. "Contractual Dualism, Market Power and Informality," Economic Journal, Royal Economic Society, vol. 125(589), pages 1534-1573, December.
    7. Gabriel Ulyssea, 2018. "Firms, Informality, and Development: Theory and Evidence from Brazil," American Economic Review, American Economic Association, vol. 108(8), pages 2015-2047, August.
    8. Paul Maarek & Elsa Orgiazzi, 2014. "Labor Share and development," Economics Working Paper Archive (University of Rennes & University of Caen) 201410, Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS.
    9. Rahul Anand & Purva Khera, 2016. "Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India," IMF Working Papers 2016/047, International Monetary Fund.
    10. Kameliia Petrova, 2016. "Entrepreneurship And The Informal Economy: An Empirical Analysis," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-21, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kaplan, David S., 2009. "Job creation and labor reform in Latin America," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 91-105, March.
    2. Henley, Andrew & Arabsheibani, G. Reza & Carneiro, Francisco G., 2009. "On Defining and Measuring the Informal Sector: Evidence from Brazil," World Development, Elsevier, vol. 37(5), pages 992-1003, May.
    3. World Bank, 2009. "Federative Republic of Brazil - Social Insurance and Labor Supply : Assessing Incentives and Redistribution," World Bank Publications - Reports 12667, The World Bank Group.
    4. Charlot, Olivier & Malherbet, Franck & Terra, Cristina, 2015. "Informality in developing economies: Regulation and fiscal policies," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 1-27.
    5. Ulyssea, Gabriel, 2010. "Regulation of entry, labor market institutions and the informal sector," Journal of Development Economics, Elsevier, vol. 91(1), pages 87-99, January.
    6. Pedro C Ferreira & Marcelo R Dos Santos & Flavio Cunha, 2010. "The Impact of Social Security Reform on Occupational and Retirement Behavior: A Quantitative Assessment for Brazil," 2010 Meeting Papers 977, Society for Economic Dynamics.
    7. Flórez, Luz A., 2017. "Informal sector under saving: A positive analysis of labour market policies," Labour Economics, Elsevier, vol. 44(C), pages 13-26.
    8. Nihar Shembavnekar, 2015. "Tariff Liberalisation, Labour Market Flexibility and Employment: Evidence from India," Working Paper Series 8115, Department of Economics, University of Sussex Business School.
    9. Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," SciencePo Working papers hal-03587627, HAL.
    10. Adriana Kugler & Maurice Kugler, 2009. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 335-358, January.
    11. Cardullo, Gabriele & Conti, Maurizio & Sulis, Giovanni, 2015. "Sunk capital, unions and the hold-up problem: Theory and evidence from cross-country sectoral data," European Economic Review, Elsevier, vol. 76(C), pages 253-274.
    12. Michaillat, Pascal & Saez, Emmanuel, 2019. "Beveridgean Unemployment Gap," CEPR Discussion Papers 14132, C.E.P.R. Discussion Papers.
    13. Pierre Cahuc & Stéphane Carcillo & Thomas Le Barbanchon, 2019. "The Effectiveness of Hiring Credits," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(2), pages 593-626.
    14. Brandon Vick, 2017. "Measuring links between labor monopsony and the gender pay gap in Brazil," IZA Journal of Migration and Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 7(1), pages 1-28, December.
    15. repec:spo:wpmain:info:hdl:2441/3aom2mve1k829p8sp4h3vrpgkg is not listed on IDEAS
    16. Adriana D. Kugler & Maurice D. Kugler & Luis O. Herrera-Prada, 2017. "Do Payroll Tax Breaks Stimulate Formality? Evidence from Colombia’s Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2017), pages 3-40, November.
    17. Renata Narita, 2020. "Self-Employment in Developing Countries: A Search-Equilibrium Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 1-34, January.
    18. William Hawkins & Daron Acemoglu, 2007. "Equilibrium Unemployment in a Generalized Search Model," 2007 Meeting Papers 384, Society for Economic Dynamics.
    19. repec:hal:spmain:info:hdl:2441/4ra95789n9nrr59b6lmini6tp is not listed on IDEAS
    20. Beugnot, Julie & Tidball, Mabel, 2010. "Multiple equilibria model with intrafirm bargaining and matching frictions," Labour Economics, Elsevier, vol. 17(5), pages 810-822, October.
    21. Simon Jäger & Benjamin Schoefer & Samuel Young & Josef Zweimüller, 2020. "Wages and the Value of Nonemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(4), pages 1905-1963.
    22. repec:ilo:ilowps:403814 is not listed on IDEAS
    23. Björn Brügemann & Pieter Gautier & Guido Menzio, 2019. "Intra Firm Bargaining and Shapley Values," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(2), pages 564-592.

    More about this item

    Keywords

    Informality; product and labor; market imperfections; firm size;
    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
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lvl:lacicr:1043. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Manuel Paradis (email available below). General contact details of provider: https://edirc.repec.org/data/cirpeca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.