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Exchange Rate Appreciations, Labor Market Rigidities, and Informality

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Author Info
Norbert Fiess
Marco fugazza
William Maloney

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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 Department of 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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  4. Edwards, Sebastian, 1996. "Exchange-Rate Anchors, Credibility, and Inertia: A Tale of Two Crises, Chile and Mexico," American Economic Review, American Economic Association, vol. 86(2), pages 176-80, May. [Downloadable!] (restricted)
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  12. Sebastian Edwards & Alejandra Cox Edwards, 2000. "Economic Reforms and Labor Markets: Policy Issues and Lessons from Chile," NBER Working Papers 7646, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. 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.
  14. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. N Fiess & M Fugazza & WF Maloney, 2006. "Informal Labor Markets and Macroeconomic Fluctuations," Working Papers 2006_17, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  3. William F. Maloney & Jairo Nunez Mendez, 2003. "Measuring the Impact of Minimum Wages: Evidence from Latin America," NBER Working Papers 9800, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Mark McGillivray & Farhad Noorbakhsh, . "Aid, Conflict and Human Development," Working Papers 2007_03, Department of Economics, University of Glasgow. [Downloadable!]
  5. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2008. "Informality and Macroeconomic Fluctuations," IZA Discussion Papers 3519, Institute for the Study of Labor (IZA). [Downloadable!]
  6. Norbert Fiess & Marco Fugazza, 2008. "Trade Liberalisation and Informality: New stylized facts," Working Papers 2008_34, Department of Economics, University of Glasgow. [Downloadable!]
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