Product market regulation, firm size, unemployment and informality in developing economies
AbstractThis paper studies the impact of product and labor market regulations on informality and unemployment in a general framework where formal and informal firms are subject to the same externalities, differing only with respect to some parameter values. Both formal and informal firms have monopoly power in the goods market, they are subject to matching friction in the labor market, and wages are determined through bargaining between large firms and their workers. The informal sector is found to be endogenously more competitive than the formal one. We find that lower strictness of product or labor market regulations lead to a simultaneous reduction in informality and unemployment. The difference between these two policy options lies on their effect on wages. Lessening product market strictness increases wages in both sector but also increases the formal sector wage premium. The opposite is true for labor market regulation. Finally, we show that the so-called overhiring externality due to wage bargaining translates into a smaller relative size of the informal sector.
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Bibliographic InfoPaper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2011-03.
Date of creation: 2011
Date of revision:
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Informality; Product and Labor Market Imperfections; Firm Size;
Other versions of this item:
- Olivier Charlot & Franck Malherbet & Cristina Terra, 2011. "Product market regulation, firm size, unemployment and informality in developing economies," Working Papers hal-00568676, HAL.
- Charlot, Olivier & Malherbet, Franck & Terra, Cristina, 2011. "Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies," IZA Discussion Papers 5519, Institute for the Study of Labor (IZA).
- Olivier Charlot & Franck Malherbet & Cristina Terra, 2010. "Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies," Cahiers de recherche 1043, CIRPEE.
- E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
- E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
- J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General
- L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-19 (All new papers)
- NEP-DEV-2011-03-19 (Development)
- NEP-LAB-2011-03-19 (Labour Economics)
- NEP-MAC-2011-03-19 (Macroeconomics)
- NEP-REG-2011-03-19 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cahuc, Pierre & Marque, François & Wasmer, Etienne, 2004.
"A Theory of Wages and Labour Demand with Intra-firm Bargaining and Matching Frictions,"
CEPR Discussion Papers
4605, C.E.P.R. Discussion Papers.
- 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, 08.
- Basu, Arnab K. & Chau, Nancy & Kanbur, Ravi, 2011.
"Contractual Dualism, Market Power and Informality,"
IZA Discussion Papers
5845, Institute for the Study of Labor (IZA).
- Charlot, Olivier & Malherbet, Franck & Ulus, Mustafa, 2013.
"Unemployment Compensation and the Allocation of Labor in Developing Countries,"
GIAM Working Papers
13-3, Galatasaray University Economic Research Center.
- Charlot, Olivier & Malherbet, Franck & Ulus, Mustafa, 2013. "Unemployment Compensation and the Allocation of Labor in Developing Countries," IZA Discussion Papers 7233, Institute for the Study of Labor (IZA).
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