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Cheaper AI, More Informality? A Dual Labor Market Model for Developing Economies

Author

Listed:
  • Gabriel Montes-Rojas

    (IIEP-UBA/CONICET)

  • Fernando Toledo

    (UNLP)

  • Juan Manuel Rodríguez Repeti

    (IIEP-UBA)

Abstract

This paper studies what happens when AI gets cheaper, with emphasis on the labor market outcomes, whether it creates formal jobs or whether it pushes workers into informality. We argue that the answer depends on the elasticity of substitution between imported AI capital and formal labor. We build a small open economy DSGE model with a dual labor market, imported AI capital, and country risk, calibrated to an economy where informality is pervasive. The same decline in AI prices produces sharply different labor-market outcomes depending on whether AI substitutes or complements formal workers. Under substitution, cheaper AI weakens formal labor demand and increases the role of the informal sector as an employment buffer. Under complementarity, it expands formal employment and amplifies output, wages, investment, and capital accumulation. The model therefore shows that AI can become either a source of displacement pressure or a driver of formal-sector expansion, depending on how it interacts with human labor.

Suggested Citation

  • Gabriel Montes-Rojas & Fernando Toledo & Juan Manuel Rodríguez Repeti, 2026. "Cheaper AI, More Informality? A Dual Labor Market Model for Developing Economies," Working Papers 401, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:401
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    References listed on IDEAS

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    1. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    2. Andres Fernandez & Felipe Meza, 2015. "Informal Employment and Business Cycles in Emerging Economies: The Case of Mexico," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 381-405, April.
    3. Erik Brynjolfsson & Danielle Li & Lindsey Raymond, 2025. "Generative AI at Work," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 140(2), pages 889-942.
    4. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).
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    More about this item

    Keywords

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    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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