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The Effects of Labour Market Policies in an Economy with an Informal Sector

In this paper, we build an equilibrium search and matching model of an economy with an informal sector. Our model extends Mortensen and Pissarides (1994) by allowing for ex ante worker heterogeneity with respect to formal-sector productivity. We use the model to analyze the effects of labour market policy on informal-sector and formal sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, we examine the distributional implications of labour market policy; specifically, we analyse how labour market policy affects the distributions of wages and productivities across formal-sector matches. Keywords: Informality and Labour Market Policy

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Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv208.

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Length: 36 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:ila:ilades:inv208
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  1. Dale T. Mortensen & Christopher A. Pissarides, 1999. "Job Reallocation, Employment Fluctuations and Unemployment," CEP Discussion Papers dp0421, Centre for Economic Performance, LSE.
  2. Mortensen, Dale T & Pissarides, Christopher, 2001. "Taxes, Subsidies and Equilibrium Labour Market Outcomes," CEPR Discussion Papers 2989, C.E.P.R. Discussion Papers.
  3. Satchi, Mathan & Temple, Jonathan, 2006. "Growth and Labour Markets in Developing Countries," CEPR Discussion Papers 5515, C.E.P.R. Discussion Papers.
  4. Boeri, Tito & Garibaldi, Pietro, 2006. "Shadow Sorting," CEPR Discussion Papers 5487, C.E.P.R. Discussion Papers.
    • Tito Boeri & Pietro Garibaldi, 2005. "Shadow Sorting," NBER Chapters, in: NBER International Seminar on Macroeconomics 2005, pages 125-163 National Bureau of Economic Research, Inc.
  5. Adriana Kugler & Maurice Kugler, 2009. "Labor Market Effects of Payroll Taxes in Developing Countries: Evidence from Colombia," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 335-358, 01.
  6. Gong, Xiaodong & van Soest, Arthur & Villagomez, Elizabeth, 2000. "Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," IZA Discussion Papers 213, Institute for the Study of Labor (IZA).
  7. Kolm, Ann-Sofie & Larsen, Birthe, 2006. "Does Tax Evasion Affect Unemployment and Educational Choice?," Working Papers 12-2003, Copenhagen Business School, Department of Economics.
  8. Kolm, Ann-Sofie & Larsen, Birthe, 2002. "Social norm, the informal sector and unemployment," Working Papers 04-2002, Copenhagen Business School, Department of Economics.
  9. Sebasti=E1n Galiani & Hugo A. Hopenhayn, 2001. "Duration and Risk of Unemployment in Argentina," Labor and Demography 0012002, EconWPA.
  10. Kugler, Adriana & Kugler, Maurice, 2003. "The Labor Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia," IZA Discussion Papers 852, Institute for the Study of Labor (IZA).
  11. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  12. Dolado, Juan J. & Jansen, Marcel & Jimeno, Juan F., 2005. "Dual Employment Protection Legislation: A Framework for Analysis," IZA Discussion Papers 1564, Institute for the Study of Labor (IZA).
  13. Mariano Bosch, 2006. "Job Creation and Job Destruction in the Presence of Informal Labour Markets," CEP Discussion Papers dp0761, Centre for Economic Performance, LSE.
  14. Camilo Mondragón-Vélez & Ximena Peña, 2010. "Business Ownership and Self-Employment in Developing Economies: The Colombian Case," NBER Chapters, in: International Differences in Entrepreneurship, pages 89-127 National Bureau of Economic Research, Inc.
  15. Masatlioglu Yusufcan & Rigolini Jamele, 2008. "Informality Traps," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-24, December.
  16. Pratap, Sangeeta & Quintin, Erwan, 2006. "Are labor markets segmented in developing countries? A semiparametric approach," European Economic Review, Elsevier, vol. 50(7), pages 1817-1841, October.
  17. Stephen L. Parente & Richard Rogerson & Randall Wright, 2000. "Homework in Development Economics: Household Production and the Wealth of Nations," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 680-687, August.
  18. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  19. 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.
  20. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  21. Dolado, Juan J. & Jansen, Marcel & Jimeno, Juan F., 2007. "A Positive Analysis of Targeted Employment Protection Legislation," IZA Discussion Papers 2679, Institute for the Study of Labor (IZA).
  22. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
  23. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  24. Douglas Gollin & Stephen L. Parente & Richard Rogerson, 2004. "Farm Work, Home Work, and International Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 827-850, October.
  25. 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.
  26. Gong, Xiaodong & van Soest, Arthur, 2001. "Wage Differentials and Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," IZA Discussion Papers 329, Institute for the Study of Labor (IZA).
  27. Fugazza, Marco & Jacques, Jean-Francois, 2004. "Labor market institutions, taxation and the underground economy," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 395-418, January.
  28. Zenou, Yves, 2008. "Job search and mobility in developing countries. Theory and policy implications," Journal of Development Economics, Elsevier, vol. 86(2), pages 336-355, June.
  29. Benhabib, Jess & Rogerson, Richard & Wright, Randall, 1991. "Homework in Macroeconomics: Household Production and Aggregate Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1166-87, December.
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