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Cyclical Informality and Unemployment

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Author Info
Mariano Bosch (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante)
Julen Esteban-Pretel (Faculty of Economics, University of Tokyo)

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Abstract

The proportion of informal or unprotected workers in developing countries is large. In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects on the unemployment rate, and also produce large reallocations of workers between "regulated" and "unregulated" jobs. In this paper, we report the main cyclical patterns of one such labor market: Brazil. We then use the empirical regularities found in the data to build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally. We find that our model, built in the spirit of traditional search and matching models, can explain well most of the cyclical properties found in the data. We also show that government policies that decrease the cost of formal jobs, or increase the cost of informality, raise the share of formal employment while reducing unemployment.

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Publisher Info
Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-613.

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Length: 41pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:tky:fseres:2009cf613

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  1. Fabio Kanczuk, 2004. "Real Interest Rates and Brazilian Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 436-455, April. [Downloadable!] (restricted)
  2. Jasper Hoek, 2002. "Labor Market Institutions and Restructuring: Evidence from Regulated and Unregulated Labor Markets in Brazil," William Davidson Institute Working Papers Series 484, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  3. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January. [Downloadable!] (restricted)
  5. Gustavo Gonzaga, 2003. "Labor Turnover and Labor Legislation in Brazil," Textos para discussão 475, Department of Economics PUC-Rio (Brazil). [Downloadable!]
  6. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
  7. Kolm, Ann-Sofie & Larsen, Birthe, 2004. "Does tax evasion affect unemployment and educational choice?," Working Paper Series 2004:4, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
    Other versions:
  8. Rita Almeida & Pedro Carneiro, 2005. "Enforcement of Regulation, Informal Labor and Firm Performance," IZA Discussion Papers 1759, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  9. Bosch, Mariano & Maloney, William F., 2008. "Cyclical Movements in Unemployment and Informality in Developing Countries," IZA Discussion Papers 3514, Institute for the Study of Labor (IZA). [Downloadable!]
  10. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  11. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 1-37, February. [Downloadable!] (restricted)
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  12. Bosch, Mariano & Maloney, William, 2008. "Cyclical movements in unemployment and informality in developing countries," Policy Research Working Paper Series 4648, The World Bank. [Downloadable!]
  13. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  14. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  15. Almeida, Rita & Carneiro, Pedro, 2005. "Enforcement of labor regulation, informal labor, and firm performance," Policy Research Working Paper Series 3756, The World Bank. [Downloadable!]
  16. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Maxim Bouev, 2002. "Official Regulations and the Shadow Economy: A Labour Market Approach," William Davidson Institute Working Papers Series 524, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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This page was last updated on 2009-11-27.

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