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Product market regulation, firm size, unemployment and informality in developing economies

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Author Info

  • Olivier Charlot

    (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise, CIRPEE - Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi)

  • Franck Malherbet

    (Université de Rouen - UFR droit, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Cristina Terra

    (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)

Abstract

This 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 Info

Paper provided by HAL in its series Working Papers with number hal-00568676.

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Date of creation: 23 Feb 2011
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Handle: RePEc:hal:wpaper:hal-00568676

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Related research

Keywords: Informality; Product and Labor Market Imperfections; Firm Size;

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  1. 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.
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Cited by:
  1. Basu, Arnab K & Chau, Nancy H & Kanbur, Ravi, 2011. "Contractual Dualism, Market Power and Informality," CEPR Discussion Papers 8485, C.E.P.R. Discussion Papers.
  2. 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.

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