Informal Work along the Business Cycle: Evidence from Argentina

We shed light on the driving forces behind unemployment uctuations and short-run changes in the informality rate on the Argentine labor market. Using Argentine survey data, we measure worker ows between formal employment, informal employment, unemployment and non-participation. We propose a methodology to correct for the discontinuity of Argentine survey data and that is able to compute consistent time series of quarterly ins and outs of informal work. Using variance decompositions and counterfactual exercises, we show that the ins and outs of informal employment are key drivers of labor market uctuations. In particular, out ows from unemployment to informal employment account for 37% of uctuations in the unemployment rate. In addition, our analysis suggests that informality is: (i) a exible sector that is used in recessionary periods as a bu er against income losses and (ii) a stepping stone towards formal employment. The observed large changes in the informality rate are well explained by the change in job mobility between the formal and informal sectors as well as variations in hirings from unemployment and non-participation in the informal sector.