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Informal Labor Markets and Macroeconomic Fluctuations

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

Abstract

This paper examines the adjustment of developing country labor markets to macroeconomic shocks. It models a two sector labor market: a formal salaried (tradable) sector that may or may not be affected by union or legislation induced wage rigidities, and an unregulated (nontradable) self-employment sector facing liquidity constraints to entry. This is embedded in a standard small economy macro model that permits the derivation of patterns of comovement among relative salaried/self-employed incomes, salaried/self-employed sector sizes and the real exchange rate with respect to different types of shocks in contexts with and without wage rigidities. The paper then explores time series data from Argentina, Brazil, Colombia and Mexico to test for cointegrating relationships corresponding to the patterns predicted by theory. We identify two types of regime. The first corresponds to periods where demand shocks to the nontradable sector offer new opportunities to (informal) entrepreneurs, the informal sector expands ?procyclically,? and the exchange rate overshoots toward appreciation in the short run, or remains at its productivity determined levels. The second corresponds to periods of negative shocks to the formal salaried sector in the presence of wage rigidities where the sector plays a more traditional ?buffer? role during downturns. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Göttingen 2007 with number 6.

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Date of creation: 2007
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Handle: RePEc:zbw:gdec07:6529

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Keywords: Informality; Labor market dynamics; Self-employment; Real exchange rates;

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References

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  1. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, Elsevier, vol. 53(1-3), pages 211-244.
  2. Hakkio, Craig S. & Rush, Mark, 1991. "Cointegration: how short is the long run?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 10(4), pages 571-581, December.
  3. James J. Heckman & Carmen Pagés, 2004. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number heck04-1.
  4. William Maloney & Jairo Mendez, 2004. "Measuring the Impact of Minimum Wages. Evidence from Latin America," NBER Chapters, National Bureau of Economic Research, Inc, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 109-130 National Bureau of Economic Research, Inc.
  5. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers, University of Copenhagen. Department of Economics 92-04, University of Copenhagen. Department of Economics.
  6. HAMILTON, Jonathan & THISSE, Jacques-François & ZENOU, Yves, . "Wage competition with heterogeneous workers and firms," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1463, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 808-27, August.
  8. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series, The World Bank 4078, The World Bank.
  9. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 519-35, June.
  10. Maloney, William, 2003. "Informality revisited," Policy Research Working Paper Series, The World Bank 2965, The World Bank.
  11. Norbert Fiess & Marco fugazza & William Maloney, 2002. "Exchange Rate Appreciations, Labor Market Rigidities, and Informality," Working Papers, Business School - Economics, University of Glasgow 2005_15, Business School - Economics, University of Glasgow.
  12. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 2(2), pages 306-333.
  13. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 60(1), pages 126-42, March.
  14. Pratap, Sangeeta & Quintin, Erwan, 2006. "Are labor markets segmented in developing countries? A semiparametric approach," European Economic Review, Elsevier, Elsevier, vol. 50(7), pages 1817-1841, October.
  15. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  16. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 647-66, September.
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Citations

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Cited by:
  1. Manoel Bittencourt, 2010. "Financial development and inequality: Brazil 1985–1994," Economic Change and Restructuring, Springer, Springer, vol. 43(2), pages 113-130, May.
  2. Paul Levine & Emanuela Lotti & Nicoletta Batini & Young-Bae Kim, 2010. "Informal Labour and Credit Markets: A Survey," IMF Working Papers, International Monetary Fund 10/42, International Monetary Fund.
  3. Bosch, Mariano & Goni, Edwin & Maloney, William, 2007. "The determinants of rising informality in Brazil : Evidence from gross worker flows," Policy Research Working Paper Series, The World Bank 4375, The World Bank.
  4. Bosch, Mariano & Maloney, William F., 2008. "Cyclical Movements in Unemployment and Informality in Developing Countries," IZA Discussion Papers 3514, Institute for the Study of Labor (IZA).
  5. Joanna Tyrowicz & Stanisław Cichocki, 2010. "Employed Unemployed? On Shadow Employment During Transition," Working Papers, Faculty of Economic Sciences, University of Warsaw 2010-05, Faculty of Economic Sciences, University of Warsaw.
  6. Manoel Bittencourt, 2008. "Macroeconomic Performance and Inequality: Brazil 1983-1994," Working Papers, Economic Research Southern Africa 101, Economic Research Southern Africa.
  7. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series, The World Bank 4078, The World Bank.
  8. Joanna Tyrowicz & Stanisław Cichocki, 2011. "Employed unemployed? On shadow employment in transition," Empirica, Springer, Springer, vol. 38(2), pages 259-281, May.

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