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Wages and Informality in Developing Countries

Author

Listed:
  • Costas Meghir

    (Economics department - MIT - Massachusetts Institute of Technology)

  • Renata Narita

    (USP - Universidade de São Paulo = University of São Paulo)

  • Jean-Marc Robin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Economics department - MIT - Massachusetts Institute of Technology)

Abstract

We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market.

Suggested Citation

  • Costas Meghir & Renata Narita & Jean-Marc Robin, 2015. "Wages and Informality in Developing Countries," Post-Print hal-03587627, HAL.
    • Handle: RePEc:hal:journl:hal-03587627
    DOI: 10.1257/aer.20121110
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03587627v1
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    More about this item

    Keywords

    Equilibrium wage-posting model; Brazilian labor; Formal labor market;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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