Macroeconomic adjustment with segmented labor markets
This paper analyzes the macroeconomic effects of fiscal and labor market policies in a small open developing country. The basic framework considers an economy with a large informal production sector and a heterogeneous work force. The labor market is segmented as a result of efficiency considerations and minimum wage laws. The basic model is then extended to account for unemployment benefits, income taxation, and imperfect labor mobility across sectors. Under the assumption of perfect labor mobility, we show that a permanent reduction in government spending on nontraded goods leads in the long run to a depreciation of the real exchange rate, a fall in the market-clearing wage for unskilled labor, an increase in output of traded goods, and a lower stock of net foreign assets. A permanent reduction in the minimum wage for unskilled workers improves competitiveness, and expands the formal sector at the expense of the informal sector. Hence, in a two-sector economy in which the minimum wage is enforced only in the formal sector and wages in one segment of the labor market are competitively determined, efficiency wage considerations do not alter the standard neoclassical presumption. A reduction in unemployment benefits is also shown to have a positive effect on output of tradable goods by lowering both the level of efficiency wages and the employment rent of skilled workers.
(This abstract was borrowed from another version of this item.)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Agenor, Pierre-Richard & Aizenman, Joshua, 1997.
"Technological change, relative wages, and unemployment,"
European Economic Review,
Elsevier, vol. 41(2), pages 187-205, February.
- Joshua Aizenman & Pierre-Richard Agénor, 1994. "Technological Change, Relative Wages, and Unemployment," IMF Working Papers 94/111, International Monetary Fund.
- Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
- Lindbeck, A. & Snower, D.J., 1990. "Segmented Labour Markets and Unemployment," Papers 483, Stockholm - International Economic Studies.
- Lindbeck, Assar & Snower, Dennis J., 1991. "Segmented Labor Markets and Unemployment," CEPR Discussion Papers 523, C.E.P.R. Discussion Papers.
- Drazen, Allan, 1986. "Optimal Minimum Wage Legislation," Economic Journal, Royal Economic Society, vol. 96(383), pages 774-784, September.
- Dimitri G. Demekas, 1990. "Labor Market Segmentation in a Two-Sector Model of an Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 849-864, December.
- Dimitri G Demekas, 1990. "Labor Market Segmentation in a Two-Sector Model of An Open Economy," IMF Working Papers 90/33, International Monetary Fund.
- Julio A. Santaella & Pierre-Richard Agénor, 1993. "Efficiency Wages and Labor Mobility in an Open Economy," IMF Working Papers 93/79, International Monetary Fund.
- Carmichael, H Lorne, 1990. "Efficiency Wage Models of Unemployment--One View," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 269-295, April.
- Agenor, Pierre-Richard & Santaella, Julio A., 1998. "Efficiency wages, disinflation and labor mobility," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 267-291, February.
- Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-259, May.
- Edwards, Sebastian, 1988. "Terms of Trade, Tariffs, and Labor Market Adjustment in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(2), pages 165-185, May.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
- Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
- Horton, Susan & Kanbur, Ravi & Mazumdar, Dipak, 1991. "Labor markets in an era of adjustment : an overview," Policy Research Working Paper Series 694, The World Bank.
- Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-161, March. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:58:y:1999:i:2:p:277-296. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.