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Exclusive Goods and Formal-Sector Employment

  • Reto Foellmi
  • Josef Zweimüller

We explore how the underemployment problem of less-developed economies is related to income inequality. Consumers have nonhomothetic preferences over differentiated products of formal-sector goods and thus inequality affects the composition of aggregate demand via the price-setting behavior of firms. We find that high inequality divides the formal sector into mass producers and exclusive producers (which serve only the rich); high inequality generates an equilibrium where many workers are crowded into the informal economy; and an increase in subsistence productivity raises the unskilled workers' wages and boosts employment due to the higher purchasing power of poorer households. (JEL D31, D43, E24, E26, J24)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.1.242
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 3 (2011)
Issue (Month): 1 (January)
Pages: 242-72

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Handle: RePEc:aea:aejmac:v:3:y:2011:i:1:p:242-72
Note: DOI: 10.1257/mac.3.1.242
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Chol-Won Li., . "Inequality and Growth: A Schumpeterian Perspective," Working Papers 9609, Business School - Economics, University of Glasgow, revised Feb 1998.
  2. James Tybout, 1998. "Manufacturing Firms In Developing Countries: How Well Do They Do, And Why?," Development and Comp Systems 9805004, EconWPA.
  3. Flam, Harry & Helpman, Elhanan, 1987. "Vertical Product Differentiation and North-South Trade," American Economic Review, American Economic Association, vol. 77(5), pages 810-22, December.
  4. Chris Edmond & Laura Veldkamp, 2008. "Income Dispersion and Counter-Cyclical Markups," NBER Working Papers 14452, National Bureau of Economic Research, Inc.
  5. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc.
  6. Foellmi, Reto & Zweimüller, Josef, 2006. "Mass Consumption, Exclusion and Unemployment," CEPR Discussion Papers 5824, C.E.P.R. Discussion Papers.
  7. Foellmi, Reto & Oechslin, Manuel, 2007. "Who gains from non-collusive corruption?," Journal of Development Economics, Elsevier, vol. 82(1), pages 95-119, January.
  8. Dehez, Pierre, 1985. "Monopolistic equilibrium and involuntary unemployment," Journal of Economic Theory, Elsevier, vol. 36(1), pages 160-165, June.
  9. Dasgupta, Partha & Ray, Debraj, 1987. "Inequality as a Determinant of Malnutrition and Unemployment: Policy," Economic Journal, Royal Economic Society, vol. 97(385), pages 177-88, March.
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