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Exchange Rate Appreciations, Labor Market Rigidities, and Informality

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  • Norbert Fiess
  • Marco fugazza
  • William Maloney

Abstract

This paper works at the interface of the literature exploring the raison d’etre of the informal labor market and that explaining the real exchange rate appreciations occurring in many Latin American countries during periods of reform. We first build a small country-Australian style model where the informal sector is seen as an unregulated non-tradables sector, augmented by heterogeneity in entrepreneurial ability and capital adjustment costs. We then examine the behavior of the model with and without a formal sector rigidity. We show that the co-movements of relative formal/informal incomes, formal/informal sector size, and the real exchange rate can offer insight into the level of distortion in the labor market and the source of ER fluctuations. We then explore time series data from Brazil, Colombia and Mexico using multivariate co-integration techniques to establish what “regime” each country is in at various periods of time. Mexico, for instance, appears to be relative undistorted and the 1987-92 appreciation appears to be largely a function of a boom in the non-tradables sector rather than wage inertia. In spite of a secular expansion of the informal sector and there is little evidence of dualism or of a rigidity driven appreciation of the Real, from 1993-1996. Post 1995 Colombia corresponds to a classic segmented labor market and an appreciation partly driven by labor market rigidities. Graphical analysis suggests that neither the Argentine appreciation (1988-1992) or the celebrated Chilean appreciation (1975-1982) were driven by inertial forces.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2005_15.

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Date of creation: Feb 2002
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Handle: RePEc:gla:glaewp:2005_15

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Citations

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Cited by:
  1. Arias, Omar & Blom, Andreas & Bosch, Mariano & Cunningham, Wendy & Fiszbein, Ariel & Lopez Acevedo, Gladys & Maloney, William & Saavedra, Jaime & Sanchez-Paramo, Carolina & Santamaria, Mauricio & Siga, 2005. "Pending issues in protection, productivity growth, and poverty reduction," Policy Research Working Paper Series 3799, The World Bank.
  2. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2008. "Informality and Macroeconomic Fluctuations," IZA Discussion Papers 3519, Institute for the Study of Labor (IZA).
  3. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2007. "Informal Labor Markets and Macroeconomic Fluctuations," Proceedings of the German Development Economics Conference, Göttingen 2007 6, Verein für Socialpolitik, Research Committee Development Economics.
  4. Gasparini Leonardo & Leonardo Tornaroli, 2009. "Labor Informality in Latin America and the Caribbean: Patterns and Trends from Household Survey Microdata," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  5. William Maloney & Jairo Mendez, 2004. "Measuring the Impact of Minimum Wages. Evidence from Latin America," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 109-130 National Bureau of Economic Research, Inc.
  6. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series 2965, The World Bank.
  7. Norbert Fiess & Marco Fugazza, 2008. "Trade Liberalisation and Informality: New stylized facts," Working Papers 2008_34, Business School - Economics, University of Glasgow.
  8. Rei, Diego & Bhattacharya, Manas, 2008. "The impact of institutions and policy on informal economy in developing countries : an econometric exploration," ILO Working Papers 413498, International Labour Organization.
  9. Mark McGillivray & Farhad Noorbakhsh, . "Aid, Conflict and Human Development," Working Papers 2007_03, Business School - Economics, University of Glasgow.

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