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Aspects of Informalization and Income Distribution in Developing Countries: A Modified Specific Factors Approach

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  • Arslan Razmi

    (University of Massachusetts Amherst)

Abstract

This paper explores aspects of increased informalization in developing countries with the help of a modified specific factors model with a fixed nominal wage in the formal sector, which is assumed to have a "lighthouse" effect on the informal sector wage. Both sectors produce a tradable good each, with informal sector production being embedded in international pro- duction networks. Comparative dynamic exercises that attempt to simulate recent economic developments in many developing countries yield plausible results, and suggest various channels for increased informalization. Contrary to standard sticky wage models, wage suppression in the formal sector leads to informalization. Changes in factor endowments create a conflict of interest between the owners of capital in the two sectors, unlike the canonical specific factors model where the conflict is between the owners of capital and labor. Finally, factors that lead to informalization are also likely to result in greater inequality in income shares between labor and capital even with nominal wages that are fixed and equal between the two sectors. JEL Categories: O17, O24, F11

Suggested Citation

  • Arslan Razmi, 2006. "Aspects of Informalization and Income Distribution in Developing Countries: A Modified Specific Factors Approach," UMASS Amherst Economics Working Papers 2006-03, University of Massachusetts Amherst, Department of Economics.
    • Handle: RePEc:ums:papers:2006-03
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    References listed on IDEAS

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    4. William Maloney & Jairo Mendez, 2004. "Measuring the Impact of Minimum Wages. Evidence from Latin America," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 109-130, National Bureau of Economic Research, Inc.
    5. Blunch, Niels-Hugo & Canagarajah, Sudharshan & Raju, Dhushyanth, 2001. "The informal sector revisited : a synthesis across space and time," Social Protection Discussion Papers and Notes 23308, The World Bank.
    6. Robert Pollin & James Heintz, 2003. "Informalization, Economic Growth and the Challenge of Creating Viable Labor Standards in Developing Countries," Working Papers wp60, Political Economy Research Institute, University of Massachusetts at Amherst.
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    8. Pablo Fajnzylber, 2001. "Minimum wage effects throughout the wage distribution: evidence from Brazil’s formal and informal sectors," Textos para Discussão Cedeplar-UFMG td151, Cedeplar, Universidade Federal de Minas Gerais.
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    More about this item

    Keywords

    Specific factors model; Ricardo-Viner model; informalization; international pro- duction networks; elasticity of factor substitution; wage rigidity.;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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