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The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors

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  • Pedro S. Amaral

    (Southern Methodist University)

  • Erwan Quintin

    (Federal Reserve Bank of Dallas)

Abstract

In most developing nations, formal workers tend to be more experienced and educated than informal workers, a fact often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that labor markets are segmented in those nations. This paper describes a model where significant differences arise between workers across sectors even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital. We argue that subsidiary implications of the model for the organization of production are borne out by the existing evidence on informal economic activities in developing countries.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0309017.

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Length: 30 pages
Date of creation: 23 Sep 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0309017

Note: Type of Document - ; pages: 30
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Web page: http://128.118.178.162

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  1. Pradhan, M. & Van Soest, A., 1993. "Formal and Informal Sector Employment in Urban Areas of Bolivia," Papers 9311, Tilburg - Center for Economic Research.
  2. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2002. "Courts: the Lex Mundi Project," NBER Working Papers 8890, National Bureau of Economic Research, Inc.
  3. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Sageeta Pratap & Erwan Quintin, 2002. "Are Labor Markets Segmented in Argentina? A Semiparametric Approach," Working Papers 0202, Centro de Investigacion Economica, ITAM.
  5. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  6. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  7. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  8. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  9. Sarte, Pierre-Daniel G., 2000. "Informality and rent-seeking bureaucracies in a model of long-run growth," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 173-197, August.
  10. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  11. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  12. Magnac, Th, 1991. "Segmented or Competitive Labor Markets," Econometrica, Econometric Society, vol. 59(1), pages 165-87, January.
  13. Tannen, Michael B, 1991. "Labor Markets in Northeast Brazil: Does the Dual Market Model Apply?," Economic Development and Cultural Change, University of Chicago Press, vol. 39(3), pages 567-83, April.
  14. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
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Cited by:
  1. Pedro de Araujo, 2008. "The Socio-Economic Distribution of AIDS Incidence and Output," Caepr Working Papers 2008-014_updated, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  2. Koziarivska Larysa & Oliinyk Andrii, 2006. "Effects of the 2004 Personal Income Tax System Reform on the Shadow Sector in Ukraine," EERC Working Paper Series 06-08e, EERC Research Network, Russia and CIS.
  3. Arvin-Rad, Hassan & Basu, Arnab K. & Willumsen, Maria, 2010. "Economic Reform, Informal-Formal Sector Linkages and Intervention in the Informal Sector in Developing Countries: A Paradox," IZA Discussion Papers 5229, Institute for the Study of Labor (IZA).
  4. José Ignacio Uribe García & Javier Andrés Castro H. & Carlos Humberto Ortíz Quevedo, 2004. "¿Que Tan Segmentado Era El Mercado Laboral Colombiano En La Decada De Los Noventa?," DOCUMENTOS DE TRABAJO-CIDSE 003829, UNIVERSIDAD DEL VALLE - CIDSE.

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