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Job Creation and Job Destruction in the Presence of Informal Labour Markets

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Author Info
Mariano Bosch
Abstract

Recessions and policy interventions in labour markets in developing countries arecharacterized not only by changes in the unemployment rate, but also by changes in theproportion of formal or protected jobs. This reallocation between formal and informal jobs islarge and occurs mainly because the job finding rate of formal jobs reacts substantially morethan the job finding rate of informal jobs. This paper presents a search and matching model tocapture this fact. I assume that firms operate the within firm margin of formality, choosing tolegalize only those matches that are good enough to compensate the costs of formality. In thisframework, recessions or stricter regulations in the labour market trigger two effects. Asexpected, they lower the incentives to post vacancies (meeting effect), but also affect thefirms' hiring standards, favouring informal contracts (offer effect). This new channel shedslight on how the actions of policy makers alter the outcomes in an economy with informaljobs. For instance, attempts to protect employment by increasing .ring costs will reallocateworkers to informal jobs, where job separation is high. They are also likely to increaseunemployment.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0761.

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Date of creation: Nov 2006
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Handle: RePEc:cep:cepdps:dp0761

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Related research
Keywords: Informal economy; search models; labour markets; regulations.;

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Find related papers by JEL classification:
J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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  1. James Albrecht & Lucas Navarro & Susan Vroman, . "The Effects of Labor Market Policies in an Economy with an Informal Sector," Working Papers gueconwpa~06-06-06, Georgetown University, Department of Economics. [Downloadable!]
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  2. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Kolm, Ann-Sofie & Larsen, Birthe, 2004. "Does tax evasion affect unemployment and educational choice?," Working Paper Series 2004:4, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
    Other versions:
  4. Satchi, Mathan & Temple, Jonathan, 2006. "Growth and Labour Markets in Developing Countries," CEPR Discussion Papers 5515, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 381-402, July. [Downloadable!] (restricted)
  6. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December. [Downloadable!] (restricted)
  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  8. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 1-37, February. [Downloadable!] (restricted)
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  9. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, Oxford University Press, vol. 13(2), pages 275-302, May.
  10. Ricardo Paes de Barros & Carlos Henrique Corseuil, 2001. "The Impact of Regulations on Brazilian Labor Market Performance," RES Working Papers 3124, Inter-American Development Bank, Research Department. [Downloadable!]
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  11. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May. [Downloadable!] (restricted)
  12. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July. [Downloadable!] (restricted)
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  13. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  14. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  15. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January. [Downloadable!] (restricted)
  16. Maxim Bouev, 2002. "Official Regulations and the Shadow Economy: A Labour Market Approach," William Davidson Institute Working Papers Series 524, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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