The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors
AbstractIn 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 InfoPaper provided by EconWPA in its series Macroeconomics with number 0309017.
Length: 30 pages
Date of creation: 23 Sep 2003
Date of revision:
Note: Type of Document - ; pages: 30
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Other versions of this item:
- Pedro Amaral & Erwan Quintin, 2004. "The implications of capital-skill complementarity in economies with large informal sectors," Center for Latin America Working Papers 0404, Federal Reserve Bank of Dallas.
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
- E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
This paper has been announced in the following NEP Reports:
- NEP-DEV-2003-09-28 (Development)
- NEP-DGE-2003-09-28 (Dynamic General Equilibrium)
- NEP-LAM-2003-09-28 (Central & South America)
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