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Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies

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Author Info

  • Olivier Charlot
  • Franck Malherbet
  • Cristina Terra

Abstract

This paper studies the impact of product and labor market regulations on the number and size of firms in the formal and informal sectors, as well as on relative wages, relative size of the two sectors and overall unemployment. We show that entry costs in the formal sector tend to make informal firms smaller and more numerous than informal firms, i.e., such costs render the informal sector relatively more competitive. Furthermore, it is possible to reduce informality without increasing unemployment or reducing workers’ wage by reducing entry costs in the formal sector rather than reducing labor market regulations. We also highlight a number of externalities stemming from labor and product market imperfections, allowing the size of those distortions to differ across sectors. We show that, while the so-called overhiring externality takes place in both sectors, this translates into a smaller relative size of the informal sector.

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-43.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1043.

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Date of creation: 2010
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Handle: RePEc:lvl:lacicr:1043

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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. Therese REBIERE, 2011. "Informal labor market and access to education in developing economies," EcoMod2011 2861, EcoMod.
  2. Basu, Arnab K. & Chau, Nancy & Kanbur, Ravi, 2011. "Contractual Dualism, Market Power and Informality," IZA Discussion Papers 5845, Institute for the Study of Labor (IZA).
  3. 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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