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Cyclical Informality and Unemployment

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  • Mariano Bosch

    (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante)

  • Julen Esteban-Pretel

    (Faculty of Economics, University of Tokyo)

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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Bibliographic 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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Cited by:
  1. Shutao Cao & Enchuan Shao & Pedro Silos, 2011. "Fixed-Term and Permanent Employment Contracts: Theory and Evidence," Working Papers 11-21, Bank of Canada.
  2. Giuseppe Ciccarone & Francesco Giuli & Enrico Marchetti, 2012. "Underground labor, search frictions and macroeconomic fluctuations," Departmental Working Papers of Economics - University 'Roma Tre' 0159, Department of Economics - University Roma Tre.
  3. Margolis, David N. & Navarro, Lucas & Robalino, David A., 2012. "Unemployment Insurance, Job Search and Informal Employment," IZA Discussion Papers 6660, Institute for the Study of Labor (IZA).
  4. Alonso Ortiz, Jorge & Leal Ordóñez, Julio C., 2011. "Taxes, Transfers and the Distribution of Employment in Mexico," MPRA Paper 32014, University Library of Munich, Germany.
  5. Alonso-Ortiz, Jorge & Leal Ordonez, Julio, 2013. "The Elasticity of Informality to Taxes and Transfers," MPRA Paper 49568, University Library of Munich, Germany.
  6. Lisi, Gaetano, 2011. "Matching Models of Equilibrium Unemployment: An Overview," MPRA Paper 30191, University Library of Munich, Germany.

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