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Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies

Author

Listed:
  • Charlot, Olivier

    () (University of Cergy-Pontoise)

  • Malherbet, Franck

    () (CREST (ENSAE))

  • Terra, Cristina

    () (University of Cergy-Pontoise)

Abstract

This paper studies the impact of product and labor market regulations on informality and unemployment in a general framework where formal and informal firms are subject to the same externalities, differing only with respect to some parameter values. Both formal and informal firms have monopoly power in the goods market, they are subject to matching friction in the labor market, and wages are determined through bargaining between large firms and their workers. The informal sector is found to be endogenously more competitive than the formal one. We find that lower strictness of product or labor market regulations lead to a simultaneous reduction in informality and unemployment. The difference between these two policy options lies on their effect on wages. Lessening product market strictness increases wages in both sector but also increases the formal sector wage premium. The opposite is true for labor market regulation. Finally, we show that the so-called overhiring externality due to wage bargaining translates into a smaller relative size of the informal sector.

Suggested Citation

  • Charlot, Olivier & Malherbet, Franck & Terra, Cristina, 2011. "Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies," IZA Discussion Papers 5519, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp5519
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    References listed on IDEAS

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    1. Pierre Cahuc & Francois Marque & Etienne Wasmer, 2008. "A Theory Of Wages And Labor Demand With Intra-Firm Bargaining And Matching Frictions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 943-972, August.
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    Cited by:

    1. Daniel Baksa & Zsuzsa Munkacsi, 2016. "Aging, (Pension) Reforms and the Shadow Economy in Southern Europe," Bank of Lithuania Working Paper Series 32, Bank of Lithuania.
    2. Adams, Abass & Cantah, William Godfred & Wiafe, Emmanuel Agyapong, 2014. "Income Insecurity, Job Insecurity and the Drift towards Self-employment in SSA," MPRA Paper 59615, University Library of Munich, Germany.
    3. Olivier Charlot & Franck Malherbet & Mustafa Ulus, 2016. "Unemployment Compensation and the Allocation of Labor in Developing Countries," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(3), pages 385-416, June.
    4. Therese REBIERE, 2011. "Informal labor market and access to education in developing economies," EcoMod2011 2861, EcoMod.
    5. Arnab K. Basu & Nancy H. Chau & Ravi Kanbur, 2015. "Contractual Dualism, Market Power and Informality," Economic Journal, Royal Economic Society, vol. 125(589), pages 1534-1573, December.
    6. Rahul Anand & Purva Khera, 2016. "Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India," IMF Working Papers 16/47, International Monetary Fund.
    7. Paul Maarek & Elsa Orgiazzi, 2014. "Labor Share and development," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201410, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    8. Kameliia Petrova, 2016. "Entrepreneurship And The Informal Economy: An Empirical Analysis," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-21, June.
    9. Gabriel Ulyssea, 2014. "Firms, Informality and Development: Theory and evidence from Brazil," Textos para discussão 632, Department of Economics PUC-Rio (Brazil).

    More about this item

    Keywords

    firm size; informality; product and labor market imperfections;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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