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Exchange rate appreciations, labor market rigidities, and informality

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  • Fugazza, Marco
  • Fiess, Norbert M.
  • Maloney, William

Abstract

This paper works at the interface of the literature exploring the raison d'etre of the informal labor market and that explaining the real exchange rate appreciations occurring in many Latin American countries during periods of reform. The authors first build a small country-Australian style model where the informal sector is seen as an unregulated non-tradables sector, augmented by heterogeneity in entrepreneurial ability and capital adjustment costs. They then examine the behavior of the model with and without a formal sector rigidity. It shows that the co-movements of relative formal/informal incomes, formal/informal sector size, and the real exchange rate can offer insight into the level of distortion in the labor market and the source of exchange rate fluctuations. The paper then explores time series data from Brazil, Colombia and Mexico using multivariate co-integration techniques to establish what"regime"each country is in at various periods of time. Mexico appears to be relatively undistorted and the 1987-92 appreciation appears to be largely a function of a boom in the non-tradables sector rather than wage inertia. In spite of a secular expansion of the informal sector there is little evidence of dualism or of a rigidity driven appreciation of the Real, from 1993-1996. Post 1995 Colombia corresponds to a classic segmented labor market and an appreciation partly driven by labor market rigidities. Graphical analysis suggests that neither the Argentine appreciation (1988-1992) or the celebrated Chilean appreciation (1975-1982) were driven by inertial forces

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2771.

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Date of creation: 07 Feb 2002
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Handle: RePEc:wbk:wbrwps:2771

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Keywords: Labor Policies; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research; Fiscal&Monetary Policy; Environmental Economics&Policies; Economic Theory&Research; Economic Stabilization; Macroeconomic Management; Banks&Banking Reform;

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References

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Citations

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Cited by:
  1. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2007. "Informal Labor Markets and Macroeconomic Fluctuations," Proceedings of the German Development Economics Conference, Göttingen 2007 6, Verein für Socialpolitik, Research Committee Development Economics.
  2. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2008. "Informality and Macroeconomic Fluctuations," IZA Discussion Papers 3519, Institute for the Study of Labor (IZA).
  3. Gasparini Leonardo & Leonardo Tornaroli, 2009. "Labor Informality in Latin America and the Caribbean: Patterns and Trends from Household Survey Microdata," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  4. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  5. William F. Maloney & Jairo Nunez Mendez, 2003. "Measuring the Impact of Minimum Wages: Evidence from Latin America," NBER Working Papers 9800, National Bureau of Economic Research, Inc.
  6. Norbert Fiess & Marco Fugazza, 2008. "Trade Liberalisation and Informality: New stylized facts," Working Papers 2008_34, Business School - Economics, University of Glasgow.
  7. Arias, Omar & Blom, Andreas & Bosch, Mariano & Cunningham, Wendy & Fiszbein, Ariel & Lopez Acevedo, Gladys & Maloney, William & Saavedra, Jaime & Sanchez-Paramo, Carolina & Santamaria, Mauricio & Siga, 2005. "Pending issues in protection, productivity growth, and poverty reduction," Policy Research Working Paper Series 3799, The World Bank.
  8. Rei, Diego & Bhattacharya, Manas, 2008. "The impact of institutions and policy on informal economy in developing countries : an econometric exploration," ILO Working Papers 413498, International Labour Organization.
  9. Mark McGillivray & Farhad Noorbakhsh, . "Aid, Conflict and Human Development," Working Papers 2007_03, Business School - Economics, University of Glasgow.

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