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Modeling the Effects of Labor Market Reforms in a Developing Economy

Author

Listed:
  • James Albrecht
  • Lucas Navarro
  • Susan Vroman

    (Georgetown University)

Abstract

In developing economies, substantial economic activity takes place in the informal labor market, beyond the reach of government policy. Labor market policies, which by definition apply only to the formal-sector labor market, then have important spillover effects. The relative sizes of the informal and formal sector labor markets adjust, the skill composition of the workforce in the two sectors changes, etc. In this paper, we build an equilibrium search and matching model to analyze the effects of labor market policies in a developing economy. Our model extends Mortensen and Pissarides (1994) by allowing for ex ante worker heterogeneity with respect to formal-sector productivity. We analyze the effects of labor market policy on informal- and formal-sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, our model allows us to examine the distributional implications of labor market policy; specifically, we analyze how labor market policy affects the distributions of wages and productivities across formal-sector matches.

Suggested Citation

  • James Albrecht & Lucas Navarro & Susan Vroman, 2006. "Modeling the Effects of Labor Market Reforms in a Developing Economy," 2006 Meeting Papers 744, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:744
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    Cited by:

    1. Almeida, Rita K. & Aterido, Reyes, 2011. "On-the-job training and rigidity of employment protection in the developing world: Evidence from differential enforcement," Labour Economics, Elsevier, vol. 18(S1), pages 71-82.

    More about this item

    Keywords

    job search; informal sector; severance tax; development;
    All these keywords.

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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