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Labor share, informal sector and development


  • Maarek, Paul


This paper aims to understand the pattern of the labor share of income during the development process. We highlight a U-shapped relationship between development and the labor share. Our theory emphasizes the interplay between firms'monopsony power and the size of the informal sector when the formal labor market has frictions. The size of the informal sector parameterizes workers'outside opportunities in wage setting. In the first stage of development, productivity gains are not compensated by wage increases, as most of workers'outside opportunities depend on the informal sector whose productivity remains unchanged. The labor share decreases as a result. In the second stage of development, outside opportunities rely more on productivity in formal firms as the formal sector expands. Consequently, the labor share increases. We then use a policy experiment, namely capital account liberalization episodes, in order to determine the causal impact of economic development on the labor share.

Suggested Citation

  • Maarek, Paul, 2012. "Labor share, informal sector and development," MPRA Paper 38756, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:38756

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    References listed on IDEAS

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    Cited by:

    1. Carlos Bethencourt & Fernando Perera-Tallo, 2011. "Predation, Labor Share and Development," DEGIT Conference Papers c016_039, DEGIT, Dynamics, Economic Growth, and International Trade.
    2. Guerriero, Marta & Sen, Kunal, 2012. "What Determines the Share of Labour in National Income? A Cross-Country Analysis," IZA Discussion Papers 6643, Institute for the Study of Labor (IZA).
    3. Josef C. Brada & El-hadj Bah, 2014. "Growing Income Inequality as a Challenge to 21st Century Capitalism," a/ Working Papers Series 1402, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
    4. Mehdi Senouci, 2014. "The Habakkuk hypothesis in a neoclassical framework," Working Papers hal-01206032, HAL.

    More about this item


    Development ; Informal sector ; Labor share ; Matching frictions;

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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