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Macroeconomic Adjustment with Segmented Labor Markets

  • Joshua Aizenman
  • Pierre-Richard Agénor

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 94/56.

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Length: 50
Date of creation: 01 May 1994
Date of revision:
Handle: RePEc:imf:imfwpa:94/56
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  1. Joshua Aizenman & Pierre-Richard Agénor, 1994. "Technological Change, Relative Wages, and Unemployment," IMF Working Papers 94/111, International Monetary Fund.
  2. Dimitri G. Demekas, 1990. "Labor Market Segmentation in a Two-Sector Model of an Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 37(4), pages 849-864, December.
  3. Agenor, Pierre-Richard & Santaella, Julio A., 1998. "Efficiency wages, disinflation and labor mobility," Journal of Economic Dynamics and Control, Elsevier, vol. 22(2), pages 267-291, February.
  4. Lindbeck, Assar & Snower, Dennis J., 1991. "Segmented Labor Markets and Unemployment," CEPR Discussion Papers 523, C.E.P.R. Discussion Papers.
  5. Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-61, March.
  6. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-59, May.
  7. Carmichael, H Lorne, 1990. "Efficiency Wage Models of Unemployment--One View," Economic Inquiry, Western Economic Association International, vol. 28(2), pages 269-95, April.
  8. Drazen, Allan, 1986. "Optimal Minimum Wage Legislation," Economic Journal, Royal Economic Society, vol. 96(383), pages 774-84, September.
  9. Pisauro, Giuseppe, 1991. "The effect of taxes on labour in efficiency wage models," Journal of Public Economics, Elsevier, vol. 46(3), pages 329-345, December.
  10. Julio A. Santaella & Pierre-Richard Agénor, 1993. "Efficiency Wages and Labor Mobility in an Open Economy," IMF Working Papers 93/79, International Monetary Fund.
  11. Horton, Susan & Kanbur, Ravi & Mazumdar, Dipak, 1991. "Labor markets in an era of adjustment : an overview," Policy Research Working Paper Series 694, The World Bank.
  12. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  13. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  14. Edwards, Sebastian, 1988. "Terms of Trade, Tariffs, and Labor Market Adjustment in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(2), pages 165-85, May.
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