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Informality and Long-Run Growth

Author

Listed:
  • Docquier, Frédéric

    () (Université catholique de Louvain)

  • Müller, Tobias

    () (University of Geneva)

  • Naval, Joaquín

    () (Universitat Autònoma de Barcelona)

Abstract

One of the most salient features of developing economies is the existence of a large informal sector. This paper uses quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor and long-run growth. Our model can generate transitory informality equilibria or informality-induced poverty traps. Its calibration reveals that the case for the poverty-trap hypothesis is strong: although informality serves to protect low-skilled workers from extreme poverty in the short-run, it prevents income convergence between developed and developing nations in the long run. Sudden elimination of informality would induce severe welfare losses for several generations on the transition path. Hence, we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means-tested education subsidies is the most cost-effective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means-tested education and wage subsidies is even more effective.

Suggested Citation

  • Docquier, Frédéric & Müller, Tobias & Naval, Joaquín, 2014. "Informality and Long-Run Growth," IZA Discussion Papers 7883, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7883
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    References listed on IDEAS

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    Cited by:

    1. Marco DELOGU & Frédéric DOCQUIER & Joël MACHADO, 2013. "The dynamic implications of liberalizing global migration," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013029, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Slobodan Djajić & Frédéric Docquier & Michael Michael, 2018. "Optimal Education Policy and Human Capital - Accumulation in the Context of Brain Drain," Post-Print hal-01743814, HAL.

    More about this item

    Keywords

    informality; development; education; child labor; inequality;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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