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Job creation and job destruction in the presence of informal markets

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  • Bosch, Mariano
  • Esteban-Pretel, Julen

Abstract

In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects not only on the unemployment rate, but also on the allocation of workers across regulated and unregulated jobs. In this paper, using worker flows data from Brazil, we build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally. We show that our model can explain well the main cyclical patterns that lead to those cyclical reallocations. We also show how the effect of government interventions in the labor market depend on the magnitude of the reallocation of labor across regulated and unregulated sectors. For our calibration, policies that decrease the cost of formal jobs, or increase the cost of informality, raise the share of formal employment while reducing unemployment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 98 (2012)
Issue (Month): 2 ()
Pages: 270-286

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Handle: RePEc:eee:deveco:v:98:y:2012:i:2:p:270-286

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Informal economy; Search models; Labor markets; Policy interventions;

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References

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Citations

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Cited by:
  1. Karlygash Kuralbayeva, 2013. "Effects of carbon taxes in an economy with large informal sector and rural-urban migration," Grantham Research Institute on Climate Change and the Environment Working Papers 139, Grantham Research Institute on Climate Change and the Environment.
  2. Jesús Botero G. & Christian Vargas & Álvaro Hurtado Rendón & Humberto Franco, 2014. "Informality and formality: Fiscal policy in DSGE model," DOCUMENTOS DE TRABAJO CIEF 010925, UNIVERSIDAD EAFIT.
  3. David Bardey & Fermando Jaramillo & Ximena Pena, 2013. "Unemployment insurance in the presence of an informal," DOCUMENTOS DE TRABAJO 011014, UNIVERSIDAD DEL ROSARIO.
  4. Emilio Colombo & Luisanna Onnis & Patrizio Tirelli, 2013. "Shadow economies at times of banking crises: empirics and theory," Working Papers 234, University of Milano-Bicocca, Department of Economics, revised Feb 2013.
  5. Edoardo Di Porto & Leandro Elia & Cristina Tealdi, 2013. "The "emersion" effect: an ex post and ex ante social program evaluation on labor tax evasion in Italy," Working Papers 2/2013, IMT Institute for Advanced Studies Lucca, revised Jun 2013.
  6. Álvaro Hurtado & Hermilson Velásquez & Gustavo Canavire & Luisa Fernanda Rubiano, 2013. "Matching laboral: Una aproximación empírica y metodológica," DOCUMENTOS DE TRABAJO CIEF 010926, UNIVERSIDAD EAFIT.

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