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Firm Heterogeneity, Informal Wage and Good Governance

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  • Kar, Saibal

    ()
    (Centre for Studies in Social Sciences, Calcutta)

  • Marjit, Sugata

    ()
    (Centre for Studies in Social Sciences, Calcutta)

Abstract

We provide an analysis of enforcement policies applicable to formal sector in dual labor markets. We use a framework with heterogeneous firms, endogenous determination of informal wage and politically dictated enforcement strategies. Firms which operate both in the formal and informal sectors do very little to increase employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcement of labor laws and other regulations should not have aggregate employment effects, particularly when workers are productively homogeneous. For firms operating exclusively in the informal sector, the outcome is different. Such features determine the stringency of enforcement in a market characterized by firms with varying levels of productivity. For example, in case of firms with relatively high levels of productivity, enforcement has to be stricter than in the case with relatively low productivity firms. Taxing the more productive seems to be the optimal strategy.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5978.

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Length: 26 pages
Date of creation: Sep 2011
Date of revision:
Publication status: published in: Review of Development Economics, 2012, 16 (4), 527-539
Handle: RePEc:iza:izadps:dp5978

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Keywords: wage; informal labor; heterogeneous firms; labor regulations; enforcement;

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  1. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2009. "Revisiting the Informal Sector: A General Equilibrium Approach," MPRA Paper 52135, University Library of Munich, Germany.
  2. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1695-1725, November.
  3. Kanbur, Ravi, 2009. "Conceptualising Informality: Regulation and Enforcement," IZA Discussion Papers 4186, Institute for the Study of Labor (IZA).
  4. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "The Response of the Informal Sector to Trade Liberalization," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3874, C.E.P.R. Discussion Papers.
  5. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  6. Sugata Marjit & Vivekananda Mukherjee & Martin Kolmar, 2006. "Poverty, taxation and governance," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(3), pages 325-333.
  7. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 630-46, June.
  8. Sugata Marjit & Amit K. Biswas, 2011. "Informality, Corruption and Trade Reform," Trade Working Papers 22896, East Asian Bureau of Economic Research.
  9. Estrin, Saul & Mickiewicz, Tomasz, 2010. "Shadow Economy and Entrepreneurial Entry," IZA Discussion Papers 5053, Institute for the Study of Labor (IZA).
  10. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, Elsevier, vol. 72(1), pages 371-378, October.
  11. Esfahani, Hadi Salehi & Mookherjee, Dilip, 1995. "Productivity, contracting modes, and development," Journal of Development Economics, Elsevier, Elsevier, vol. 46(2), pages 203-231, April.
  12. Sugata Marjit & Saibal Kar & Hamid Beladi, 2007. "Trade Reform and Informal Wages," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 11(2), pages 313-320, 05.
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Cited by:
  1. Luz Adriana Flórez, 2014. "The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies," BORRADORES DE ECONOMIA 011953, BANCO DE LA REPÚBLICA.
  2. Luz Adriana Flórez, 2014. "The Search and Matching Equilibrium in an Economy with an Informal Sector: A Positive Analysis of Labor Market Policies," Borradores de Economia 831, Banco de la Republica de Colombia.

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