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Modeling Labor Market Segmentation

  • Luis Araujo
  • Vladimir Ponczek

In this paper, we develop a model that captures stylized facts of informal labor markets. We show how justice interference on informal contracts leads to penalties in the equilibrium wage of informal workers. We also state that, in a repeated game situation, an equilibrium where the wage gaps between formal and informal contracts diminish with the worker skills exists and is unique. These claims are supported by two assumptions: (i) the existence of a technology that makes possible a ?rm to buy information about the worker productivity and past actions; (ii) unskilled workers have a more homogenous productivity than the skilled workers.

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Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 09_04.

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Date of creation: 30 Apr 2009
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Handle: RePEc:fea:wpaper:09_04
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  1. Fernando Botelho & Vladimir Ponczek, 2011. "Segmentation in the Brazilian Labor Market," Economic Development and Cultural Change, University of Chicago Press, vol. 59(2), pages 437 - 463.
  2. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
  3. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
  4. Pradhan, M.P. & van Soest, A.H.O., 1993. "Formal and informal sector employment in urban areas of Bolivia," Discussion Paper 1993-11, Tilburg University, Center for Economic Research.
  5. Chandra, Vandana & Khan, M Ali, 1993. "Foreign Investment in the Presence of an Informal Sector," Economica, London School of Economics and Political Science, vol. 60(237), pages 79-103, February.
  6. repec:dgr:kubcen:200046 is not listed on IDEAS
  7. Tybout, James, 1998. "Manufacuring firms in developing countries - how well do they do, and why?," Policy Research Working Paper Series 1965, The World Bank.
  8. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  9. James J. Heckman & Carmen Pagés, 2004. "Introduction to "Law and Employment: Lessons from Latin American and the Caribbean"," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 1-108 National Bureau of Economic Research, Inc.
  10. Hartmut Lehmann & Norberto Pignatti, 2008. "Informal Employment Relationships and Labor Market Segmentation in Transition Economies: Evidence from Ukraine," ESCIRRU Working Papers 3, DIW Berlin, German Institute for Economic Research.
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-80489 is not listed on IDEAS
  12. Magnac, Th, 1991. "Segmented or Competitive Labor Markets," Econometrica, Econometric Society, vol. 59(1), pages 165-87, January.
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