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Macroeconomic Adjustment with Segmented Labor Markets

Author

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  • Mr. Joshua Aizenman
  • Pierre-Richard Agénor

Abstract

This paper analyzes the macroeconomic effects of fiscal and labor market policies in developing countries. The basic framework considers a small open economy with a large informal production sector and a heterogeneous work force. The labor market is segmented as a result of efficiency considerations and minimum wage laws. The basic model is then extended to account for unemployment benefits, income taxation, and imperfect labor mobility across sectors. The analysis indicates, among other results, that a reduction in unemployement benefits has a positive effect on output of tradable goods by lowering both the level of efficiency wages and the relative rent captured by skilled workers.

Suggested Citation

  • Mr. Joshua Aizenman & Pierre-Richard Agénor, 1994. "Macroeconomic Adjustment with Segmented Labor Markets," IMF Working Papers 1994/056, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1994/056
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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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