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Heterogeneous firms and informality: the effects of trade liberalization on labour markets

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  • Dennis Becker

Abstract

The informal sector is often seen as a way for firms to evade regulation. In this paper, I therefore investigate the role of the informal sector in the impact of trade liberalization on employment, wage inequality and welfare in a model of trade with heterogeneous firms and endogenous wage dispersion. The findings suggest that trade liberalization reduces informal employment unambiguously. Contrary to the extant literature, however, its impact on total salaried employment, wage inequality and welfare is country-specific.

Suggested Citation

  • Dennis Becker, 2018. "Heterogeneous firms and informality: the effects of trade liberalization on labour markets," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 47-72.
  • Handle: RePEc:oup:oxecpp:v:70:y:2018:i:1:p:47-72.
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    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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