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The implications of capital-skill complementarity in economies with large informal sectors

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  • Pedro Amaral
  • Erwan Quintin

Abstract

In most developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that such barriers are important. This paper describes a model where significant differences arise between formal and informal workers even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.

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Paper provided by Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0404.

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Date of creation: 2004
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Handle: RePEc:fip:feddcl:0404

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Keywords: Labor market;

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  1. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, World Bank Group, vol. 13(2), pages 275-302, May.
  2. Pierre-Daniel G. Sarte, 1999. "Informality and rent-seeking bureaucracies in a model of long-run growth," Working Paper, Federal Reserve Bank of Richmond 99-07, Federal Reserve Bank of Richmond.
  3. 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, Elsevier, vol. 45(1), pages 129-162, December.
  4. Magnac, Th, 1991. "Segmented or Competitive Labor Markets," Econometrica, Econometric Society, Econometric Society, vol. 59(1), pages 165-87, January.
  5. Sangeeta Pratap & Erwan Quintin, 2001. "Are labor markets segmented in Argentina? a semiparametric approach," Center for Latin America Working Papers, Federal Reserve Bank of Dallas 0701, Federal Reserve Bank of Dallas.
  6. Simeon Djankov & Rafael Porta & Florencio de & Andrei Shleifer, 2002. "Courts: The Lex Mundi Project," Yale School of Management Working Papers, Yale School of Management ysm277, Yale School of Management, revised 01 Nov 2003.
  7. Pradhan, M. & Van Soest, A., 1993. "Formal and Informal Sector Employment in Urban Areas of Bolivia," Papers, Tilburg - Center for Economic Research 9311, Tilburg - Center for Economic Research.
  8. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  9. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 387-92, May.
  10. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  11. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  12. Tannen, Michael B, 1991. "Labor Markets in Northeast Brazil: Does the Dual Market Model Apply?," Economic Development and Cultural Change, University of Chicago Press, vol. 39(3), pages 567-83, April.
  13. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
  14. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, Elsevier, vol. 66(2), pages 293-312, November.
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Cited by:
  1. Koziarivska Larysa & Oliinyk Andrii, 2006. "Effects of the 2004 Personal Income Tax System Reform on the Shadow Sector in Ukraine," EERC Working Paper Series 06-08e, EERC Research Network, Russia and CIS.
  2. Arvin-Rad, Hassan & Basu, Arnab K. & Willumsen, Maria, 2010. "Economic Reform, Informal-Formal Sector Linkages and Intervention in the Informal Sector in Developing Countries: A Paradox," IZA Discussion Papers 5229, Institute for the Study of Labor (IZA).
  3. José Ignacio Uribe García & Javier Andrés Castro H. & Carlos Humberto Ortíz Quevedo, 2004. "¿Que Tan Segmentado Era El Mercado Laboral Colombiano En La Decada De Los Noventa?," DOCUMENTOS DE TRABAJO-CIDSE 003829, UNIVERSIDAD DEL VALLE - CIDSE.
  4. Pedro de Araujo, 2008. "The Socio-Economic Distribution of AIDS Incidence and Output," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2008-014_updated, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.

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