Informality and Macroeconomic Fluctuations
AbstractThis 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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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3519.
Length: 51 pages
Date of creation: May 2008
Date of revision:
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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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-07-14 (All new papers)
- NEP-CBA-2008-07-14 (Central Banking)
- NEP-DEV-2008-07-14 (Development)
- NEP-ENT-2008-07-14 (Entrepreneurship)
- NEP-LAB-2008-07-14 (Labour Economics)
- NEP-MAC-2008-07-14 (Macroeconomics)
- NEP-OPM-2008-07-14 (Open Economy Macroeconomic)
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