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Labor Market Search, Informality and Schooling Investments

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  • Matteo Bobba
  • Luca Flabbi
  • Santiago Levy Algazi

Abstract

This paper develops a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether to search for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. The paper focuses on an increasingly important institution: a “dual” social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. Preferences are estimated for the system—together with all the other structural parameters of the labor market—using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost similar to that generated by the current system.

Suggested Citation

  • Matteo Bobba & Luca Flabbi & Santiago Levy Algazi, "undated". "Labor Market Search, Informality and Schooling Investments," IDB Publications (Working Papers) 8752, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:8752
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    References listed on IDEAS

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    Cited by:

    1. Gabriella Conti & Rita Ginja & Renata Narita, 2018. "The value of health insurance: a household job search approach," IFS Working Papers W18/20, Institute for Fiscal Studies.

    More about this item

    Keywords

    Informal Employment; Labor markets; Educational Level;

    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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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