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Self-Employment, Wage Employment and Informality in a Developing Economy

  • John Bennett

    ()

  • Matthew Rablen

    ()

We construct a simple model incorporating various urban labour market phenomena obtaining in developing economies. Our initial formulation assumes an integrated labour market and allows for entrepreneurship, self-employment and wage employment. We then introduce labour market segmentation. In equilibrium voluntary and involuntary self-employment, formal and informal wage employment, and formal and informal and informal entrepreneurship may all coexist. We illustrate the model by an example calibrated on Latin American data, examining individual labour market transitions and implications of education/training and labour market policies. To diminish informality, cutting the costs of formality is more effective than raising those of informality.

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Paper provided by Centre for Economic Development and Institutions(CEDI), Brunel University in its series CEDI Discussion Paper Series with number 12-02.

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Length: 37 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:edb:cedidp:12-02
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  1. El Badaoui, Eliane & Strobl, Eric & Walsh, Frank, 2007. "Is There an Informal Employment Wage Penalty? Evidence from South Africa," IZA Discussion Papers 3151, Institute for the Study of Labor (IZA).
  2. Bosch, Mariano & Maloney, William F., 2007. "Comparative Analysis of Labor Market Dynamics Using Markov Processes: An Application to Informality," IZA Discussion Papers 3038, Institute for the Study of Labor (IZA).
  3. Sebastian Galiani & Federico Weinschelbaum, 2007. "Modeling Informality Formally: Households and Firms," CEDLAS, Working Papers 0047, CEDLAS, Universidad Nacional de La Plata.
  4. Nicholas Bloom & Benn Eifert & Aprajit Mahajan & David McKenzie & John Roberts, 2011. "Does Management Matter? Evidence from India," CEP Discussion Papers dp1042, Centre for Economic Performance, LSE.
  5. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Who are the microenterprise owners ? Evidence from Sri Lanka on Tokman v. de Soto," Policy Research Working Paper Series 4635, The World Bank.
  6. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  7. Albrecht, James & Navarro, Lucas & Vroman, Susan, 2006. "The Effects of Labor Market Policies in an Economy with an Informal Sector," IZA Discussion Papers 2141, Institute for the Study of Labor (IZA).
  8. 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.
  9. Áureo de Paula & José A. Scheinkman, 2007. "The Informal Sector," NBER Working Papers 13486, National Bureau of Economic Research, Inc.
  10. Aureo de Paula & Jose A. Scheinkman, 2007. "The Informal Sector, Third Version," PIER Working Paper Archive 08-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 21 May 2008.
  11. Douglas Gollin, 2001. "Nobody's Business but My Own: Self Employment and Small Enterprise in Economic Development," Center for Development Economics 172, Department of Economics, Williams College.
  12. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  13. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank.
  14. Cunningham, Wendy & Salvagno, Javier Bustos, 2011. "Youth employment transitions in Latin America," Policy Research Working Paper Series 5521, The World Bank.
  15. Banerji, Arup & Jain, Sanjay, 2007. "Quality dualism," Journal of Development Economics, Elsevier, vol. 84(1), pages 234-250, September.
  16. 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.
  17. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2010. "Informal self-employment and macroeconomic fluctuations," Journal of Development Economics, Elsevier, vol. 91(2), pages 211-226, March.
  18. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, September.
  19. Almeida, Rita & Carneiro, Pedro, 2009. "Enforcement of labor regulation and firm size," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 28-46, March.
  20. E. Paul Durrenberger, 2005. "Labour," Chapters, in: A Handbook of Economic Anthropology, chapter 8 Edward Elgar.
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