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Informality and Macroeconomic Fluctuations

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  • Fiess, Norbert M.

    ()
    (University of Glasgow)

  • Fugazza, Marco

    (UNCTAD)

  • Maloney, William F.

    ()
    (World Bank)

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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Bibliographic 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
Date of revision:
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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References

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  1. Soren Johansen, 2002. "A Small Sample Correction for the Test of Cointegrating Rank in the Vector Autoregressive Model," Econometrica, Econometric Society, Econometric Society, vol. 70(5), pages 1929-1961, September.
  2. 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.
  3. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 2(2), pages 306-333.
  4. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  5. Fiess, Norbert & Shankar, Rashmi, 2009. "Determinants of exchange rate regime switching," Journal of International Money and Finance, Elsevier, Elsevier, vol. 28(1), pages 68-98, February.
  6. 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.
  7. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 649-70, May.
  9. Norbert Fiess & Marco fugazza & William Maloney, 2002. "Exchange Rate Appreciations, Labor Market Rigidities, and Informality," Working Papers, Business School - Economics, University of Glasgow 2005_15, Business School - Economics, University of Glasgow.
  10. Hakkio, Craig S. & Rush, Mark, 1991. "Cointegration: how short is the long run?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 10(4), pages 571-581, December.
  11. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank.
  12. Pratap, Sangeeta & Quintin, Erwan, 2006. "Are labor markets segmented in developing countries? A semiparametric approach," European Economic Review, Elsevier, Elsevier, vol. 50(7), pages 1817-1841, October.
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Cited by:
  1. Cosar, Kerem & Guner, Nezih & Tybout, James R, 2013. "Firm Dynamics, Job Turnover, and Wage Distributions in an Open Economy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9732, C.E.P.R. Discussion Papers.
  2. Peña, Ximena, 2013. "The formal and informal sectors in Colombia : country case study on labour market segmentation," ILO Working Papers, International Labour Organization 482088, International Labour Organization.
  3. Kamila Fialová, 2010. "Labor Institutions and their Impact on Shadow Economies in Europe," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2010/29, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Dec 2010.
  4. Mauricio Santa María S. & Fabián García A. & Ana Virgina Mujica P., 2009. "Los costos no laborales y el mercado laboral: impacto de la reforma de salud en Colombia," WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO, FEDESARROLLO 009186, FEDESARROLLO.

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