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Cyclical movements in unemployment and informality in developing countries

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Author Info
Bosch, Mariano
Maloney, William
Abstract

This paper analyzes the cyclical properties of worker flows in Brazil and Mexico, two important developing countries with large unregulated or “informal” sectors. It generates three stylized facts that are critical to the accurate modeling of the sector and which suggest the need to rethink the approaches to date. First, the unemployment rate is countercyclical essentially because job separations of informal workers increase dramatically in recessions. Second, the share of formal employment is countercyclical because of the difficulty of finding formal jobs from inactivity, unemployment and other informal jobs during recessions rather than because of increased separation from formal jobs. Third, flows from formality into informality are not countercyclical, but, if anything, pro-cyclical. Together, these challenge the conventional wisdom that has guided the modeling the sector that informal workers are primarily those rationed out of the formal labor market. They also offer a new synthesis of the mechanics of the cyclical adjustment process. Finally, the paper offers estimates of the moments of worker flows series that are needed for calibration.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4648.

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Date of creation: 01 Jun 2008
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Handle: RePEc:wbk:wbrwps:4648

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Keywords: Labor Markets; Labor Policies; Population Policies; Labor Standards;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Henley, Andrew & Arabsheibani, G. Reza & Carneiro, Francisco G., 2006. "On defining and measuring the informal sector," Policy Research Working Paper Series 3866, The World Bank. [Downloadable!]
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  2. Mariano Bosch & Edwin Goni & William Maloney, 2007. "The Determinants of Rising Informality in Brazil: Evidence from Gross Worker Flows," IZA Discussion Papers 2970, Institute for the Study of Labor (IZA). [Downloadable!]
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  3. N Fiess & M Fugazza & WF Maloney, 2006. "Informal Labor Markets and Macroeconomic Fluctuations," Working Papers 2006_17, Department of Economics, University of Glasgow. [Downloadable!]
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  4. Dale T. Mortensen & Éva Nagypál, 2005. "More on Unemployment and Vacancy Fluctuations," IZA Discussion Papers 1765, Institute for the Study of Labor (IZA). [Downloadable!]
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  5. Aureo de Paula & Jose A Sheinkman, 2007. "The Informal Sector," Levine's Bibliography 122247000000001663, UCLA Department of Economics. [Downloadable!]
  6. Mariano Bosch & William Maloney, 2007. "Comparative Analysis of Labor Market Dynamics Using Markov Processes: An Application to Informality," IZA Discussion Papers 3038, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Geweke, John & Marshall, Robert C & Zarkin, Gary A, 1986. "Exact Inference for Continuous Time Markov Chain Models," Review of Economic Studies, Blackwell Publishing, vol. 53(4), pages 653-69, August. [Downloadable!] (restricted)
  9. Bosch, Mariano & Maloney, William, 2007. "Comparative analysis of labor market dynamics using markov processes : an application to informality," Policy Research Working Paper Series 4429, The World Bank. [Downloadable!]
  10. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Mazumdar, Dipak, 1976. "The urban informal sector," World Development, Elsevier, vol. 4(8), pages 655-679, August. [Downloadable!] (restricted)
  12. Baker, Michael, 1992. "Unemployment Duration: Compositional Effects and Cyclical Variability," American Economic Review, American Economic Association, vol. 82(1), pages 313-21, March. [Downloadable!] (restricted)
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  14. Petrongolo, Barbara & Pissarides, Christopher, 2008. "The Ins and Outs of European Unemployment," CEPR Discussion Papers 6681, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank. [Downloadable!]
  16. 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!]
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  17. James Albrecht & Lucas Navarro & Susan Vroman, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA). [Downloadable!]
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  18. 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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  19. Robert Shimer, 2005. "The cyclicality of hires, separations, and job-to-job transitions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 493-508. [Downloadable!]
  20. Michael W. Elsby & Ryan Michaels & Gary Solon, 2007. "The Ins and Outs of Cyclical Unemployment," NBER Working Papers 12853, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Mariano Bosch & William Maloney, 2006. "Gross Worker Flows in the Presence of Informal Labor Markets. The Mexican Experience 1987-2002," CEP Discussion Papers dp0753, Centre for Economic Performance, LSE. [Downloadable!]
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  22. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, Oxford University Press, vol. 13(2), pages 275-302, May.
  23. Flinn, Christopher J & Heckman, James J, 1983. "Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States?," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 28-42, January. [Downloadable!] (restricted)
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  24. Blanchard, Olivier Jean & Diamond, Peter, 1992. "The Flow Approach to Labor Markets," American Economic Review, American Economic Association, vol. 82(2), pages 354-59, May. [Downloadable!] (restricted)
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  25. Tito Boeri & Pietro Garibaldi, . "Shadow Activity and Unemployment in a Depressed Labor Market," Working Papers 177, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  26. Christopher J. Flinn & James J. Heckman, 1982. "Models for the Analysis of Labor Force Dynamics," NBER Working Papers 0857, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  27. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn. [Downloadable!] (restricted)
  28. McKenzie, David J, 2004. "Aggregate Shocks and Urban Labor Market Responses: Evidence from Argentina's Financial Crisis," Economic Development and Cultural Change, University of Chicago Press, vol. 52(4), pages 719-58, July.
  29. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia. [Downloadable!]
  30. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July. [Downloadable!] (restricted)
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  31. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  32. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January. [Downloadable!] (restricted)
  33. Kolm, Ann-Sofie & Larsen, Birthe, 2001. "Moral Costs, The Informal Sector And Unemployment," Working Papers 01-2001, Copenhagen Business School, Department of Economics. [Downloadable!]
  34. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mariano Bosch & Julen Esteban-Pretel, 2009. "Cyclical Informality and Unemployment," CIRJE F-Series CIRJE-F-613, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  2. Bargain, Olivier & Kwenda, Prudence, 2009. "The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data," IZA Discussion Papers 4286, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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