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Wages and Informality in Developing Countries

Listed author(s):
  • Costas Meghir
  • Renata Narita
  • Jean-Marc Robin

We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market. (JEL E26, J24, J31, J46, O15, O17)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 105 (2015)
Issue (Month): 4 (April)
Pages: 1509-1546

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Handle: RePEc:aea:aecrev:v:105:y:2015:i:4:p:1509-46
Note: DOI: 10.1257/aer.20121110
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  2. El Badaoui, Eliane & Strobl, Eric & Walsh, Frank, 2010. "The formal sector wage premium and firm size," Journal of Development Economics, Elsevier, vol. 91(1), pages 37-47, January.
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  10. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
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