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Informality and Macroeconomic Fluctuations

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Author Info
Fiess, Norbert M. () (University of Glasgow)
Fugazza, Marco (UNCTAD)
Maloney, William F. () (World Bank)

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Abstract

This paper examines the adjustment of developing country labor markets to macroeconomic shocks. It models as having two sectors: a formal salaried (tradable) sector that may or may not be affected by union or legislation induced wage rigidities, and an informal (nontradable) self-employment sector facing liquidity constraints to entry. This is embedded in a standard small economy macro model that permits the derivation of patterns of comovement among relative salaried/self-employed incomes, salaried/self-employed sector sizes and the real exchange rate with respect to different types of shocks in contexts with and without wage rigidities. The paper then explores time series data from Argentina, Brazil, Colombia and Mexico to test for cointegrating relationships corresponding to the patterns predicted by theory. We confirm episodes of expansion of informal self-employment consistent with the traditional segmentation views. However, we also identify episodes consistent with the sectoral expansion being driven by relative demand or productivity shocks to the nontradables sector that lead to “procyclical” behavior of the informal self-employed sector.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3519.

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Length: 51 pages
Date of creation: May 2008
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Handle: RePEc:iza:izadps:dp3519

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Related research
Keywords: informality; labor market dynamics; self-employment; real exchange rates;

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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  1. Maloney, William F. & Nunez, Jairo & Cunningham, Wendy & Fiess, Norbert & Montenegro, Claudio & Murrugarra, Edmundo & Santamaria,Mauricio & Sepulveda, Claudia, 2001. "Measuring the impact of minimum wages : evidence from Latin America," Policy Research Working Paper Series 2597, The World Bank. [Downloadable!]
    Other versions:
  2. Craig S. Hakkio & Mark Rush, 1990. "Cointegration: how short is the long run?," Research Working Paper 90-08, Federal Reserve Bank of Kansas City.
    Other versions:
  3. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Mazumdar, Dipak, 1976. "The urban informal sector," World Development, Elsevier, vol. 4(8), pages 655-679, August. [Downloadable!] (restricted)
  5. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank. [Downloadable!]
  6. Norbert Fiess & Marco fugazza & William Maloney, 2002. "Exchange Rate Appreciations, Labor Market Rigidities, and Informality," Working Papers 2005_15, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  7. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. 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, vol. 45(1), pages 129-162, December. [Downloadable!] (restricted)
  9. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
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  11. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June. [Downloadable!] (restricted)
  12. Pratap, Sangeeta & Quintin, Erwan, 2006. "Are labor markets segmented in developing countries? A semiparametric approach," European Economic Review, Elsevier, vol. 50(7), pages 1817-1841, October. [Downloadable!] (restricted)
  13. Mariano Bosch & William Maloney, 2006. "Gross Worker Flows in the Presence of Informal Labor Markets. The Mexican Experience 1987-2002," CEP Discussion Papers dp0753, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  14. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December. [Downloadable!] (restricted)
  15. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  16. Bosch, Mariano & Goni, Edwin & Maloney, William, 2007. "The determinants of rising informality in Brazil : Evidence from gross worker flows," Policy Research Working Paper Series 4375, The World Bank. [Downloadable!]
    Other versions:
  17. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January. [Downloadable!] (restricted)
  18. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector," PIER Working Paper Archive 07-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
    Other versions:
  19. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July. [Downloadable!] (restricted)
    Other versions:
  20. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  21. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  22. Soren Johansen, 2002. "A Small Sample Correction for the Test of Cointegrating Rank in the Vector Autoregressive Model," Econometrica, Econometric Society, vol. 70(5), pages 1929-1961, September. [Downloadable!] (restricted)
  23. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254. [Downloadable!] (restricted)
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