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Informal Production and Labour Market Segmentation

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  • John Bennett

Abstract

An industry is modeled in which entrepreneurs, who are heterogeneous in ability, may produce formally or informally. Two cases are distinguished, with and without labour market segmentation, for which different patterns of formal/informal supply obtain. Without segmentation, informality may generate production where otherwise there would be none. Typically, however, a trade-off obtains: when informality makes output higher it cuts the profit of the most able entrepreneurs, potentially damaging growth. With segmentation, informality causes some replacement of 'good' jobs by 'bad,' and total employment may be affected in either direction; without segmentation the effect on total employment is weakly positive.

Suggested Citation

  • John Bennett, 2011. "Informal Production and Labour Market Segmentation," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 686-707, December.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201112)167:4_686:ipalms_2.0.tx_2-r
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    References listed on IDEAS

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    1. Eliane El Badaoui & Eric Strobl & Frank Walsh, 2008. "Is There an Informal Employment Wage Penalty? Evidence from South Africa," Economic Development and Cultural Change, University of Chicago Press, vol. 56, pages 683-710.
    2. James Albrecht & Lucas Navarro & Susan Vroman, 2009. "The Effects of Labour Market Policies in an Economy with an Informal Sector," Economic Journal, Royal Economic Society, vol. 119(539), pages 1105-1129, July.
    3. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.
    4. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
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    Cited by:

    1. repec:fau:fauart:v:67:y:2017:i:2:p:140-164 is not listed on IDEAS
    2. repec:eee:tefoso:v:131:y:2018:i:c:p:326-335 is not listed on IDEAS
    3. John Bennett & Matthew Gould & Matthew Rablen, 2012. "Risk attitudes and informal employment in a developing economy," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 1(1), pages 1-17, December.

    More about this item

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • D2 - Microeconomics - - Production and Organizations

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