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Labor Earnings Dynamics with a Large Informal Sector

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  • Diego Gomes

    (University of Alberta)

  • Cezar Santos

    (Fundacao Getulio Vargas)

  • Felipe Iachan

    (FGV)

Abstract

We study labor earnings dynamics in a developing economy with a large informal sector. We use nationally representative Brazilian panel data that cover both formal and informal workers. We provide two main contributions. First, we document large disparities in earnings fluctuations faced across these segments of the labor market, as well as the high intensity of transitions between them. Informality is associated with more volatile earnings, while agents in the formal sector are subject to significant downside risk. Transitions across formal and informal employment bring large earnings shocks on average and have a frequency that depends on age and the initial earnings level. Second, we assess the consequences of these empirical disparities on decisions of consumption and savings. Our tool is a standard life cycle model with heterogeneous agents where the earnings processes are estimated to reflect the aforementioned empirical findings. The simulations reveal sizable impacts.

Suggested Citation

  • Diego Gomes & Cezar Santos & Felipe Iachan, 2019. "Labor Earnings Dynamics with a Large Informal Sector," 2019 Meeting Papers 793, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:793
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    1. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
    2. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
    3. Mariacristina De Nardi & Giulio Fella & Gonzalo Paz Pardo, 2016. "The Implications of Richer Earnings Dynamics for Consumption and Wealth," NBER Working Papers 21917, National Bureau of Economic Research, Inc.
    4. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 83-114, June.
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