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Firm Heterogeneity, Informal Wage and Good Governance

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  • Marjit, Sugata

Abstract

We provide an analysis of enforcement policies in a framework with heterogeneous firms, endogenous determination of informal wage and politically dictated strategies. We argue that firms which operate both in the formal and informal sectors do very little to increase TOTAL employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcing labor laws and other regulations in this case should not have aggregate employment effects. For firms operating exclusively in the informal sector, the outcome is different. Such features determine the stringency of enforcement in the context of markets characterized by firms with varying levels of productivity. For example if the formal sector has firms with relatively high levels of productivity enforcement has to be stricter than in the case with relatively large number of low productive firms. This seems to be consistent with observed behavior of the authorities in the developed and the developing world. We also talk about the implications of labor market reforms on informal wage.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19168.

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Date of creation: Nov 2009
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Handle: RePEc:pra:mprapa:19168

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Keywords: Heterogeneous firms; informal sector; labor market; governance; reform.;

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  1. Saul Estrin & Tomasz Mickiewicz, 2012. "Shadow Economy and Entrepreneurial Entry," Review of Development Economics, Wiley Blackwell, vol. 16(4), pages 559-578, November.
  2. Kanbur, Ravi, 2009. "Conceptualizing Informality: Regulation and Enforcement," Working Papers 48926, Cornell University, Department of Applied Economics and Management.
  3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  4. Sugata Marjit & Saibal Kar & Hamid Beladi, 2007. "Trade Reform and Informal Wages," Review of Development Economics, Wiley Blackwell, vol. 11(2), pages 313-320, 05.
  5. Pinelopi K. Goldberg & Nina Pavcnik, 2003. "The Response of the Informal Sector to Trade Liberalization," NBER Working Papers 9443, National Bureau of Economic Research, Inc.
  6. Sugata Marjit & Amit K. Biswas, 2011. "Informality, Corruption and Trade Reform," Trade Working Papers 22896, East Asian Bureau of Economic Research.
  7. Marjit, Sugata, 2003. "Economic reform and informal wage--a general equilibrium analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 371-378, October.
  8. Esfahani, Hadi Salehi & Mookherjee, Dilip, 1995. "Productivity, contracting modes, and development," Journal of Development Economics, Elsevier, vol. 46(2), pages 203-231, April.
  9. Chaudhuri, Sarbajit & Mukhopadhyay, Ujjaini, 2009. "Revisiting the Informal Sector: A General Equilibrium Approach," MPRA Paper 52135, University Library of Munich, Germany.
  10. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-46, June.
  11. Sugata Marjit & Vivekananda Mukherjee & Martin Kolmar, 2006. "Poverty, taxation and governance," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(3), pages 325-333.
  12. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
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