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The structure of labor markets in developing countries : time series evidence on competing views

  • Maloney, William F.

Competing conceptions of the large, unprotected,"informal"workforce in developing countries differ greatly in their implications for the labor reform considered to be essential complements to trade liberalization and"fair"competition in international trade. Traditionally, the informal sector is viewed as the disadvantaged segment of a dual labor market segmented by legislated or union-induced rigidities and high labor costs in the protected (or"informal") sector. In this view, the size of the informal sector is a testament to the inefficiencies in labor allocation and the magnitude of required reform. In cyclical downturns, the informal sector is thought to absorb displaced workers from the formal sector (with informal earnings falling relative to those in the formal sector) and then to contract again during recovery as the queue for"good jobs"shortens again. A recent, related view postulates a long-term trend in which large enterprises, confronted by heightened global competition, increasingly subcontract to unprotected workers as a way to reduce costs and gain flexibility. This is particularly relevant in the debate about establishing common labor standards in regional trade agreements. The author reexamines the traditional view of the dual labor market by studying the dynamics between the formal and informal sectors across a business cycle and a period of trade liberalization in Mexico (1987-93). He shows conventional comparisions of earnings, even across time, to be unreliable tests for segmentation. As an alternative, he shows that transitions on informal employment, the size of the informal sector, and levels of mobility to be procyclical, increasing with upturns, and decreasing with recessions. He tests for, and finds, however, some evidence of queuing to enter formal employment. Overall, he contends, the informal sector behaves as an unregulated entrepreneurial sector rather than the disadvantaged wing of a dual labor market. There is evidence of increased subcontracting over time, with trade liberalization, but it is not clear that workers are worse off as a result.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1940.

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Date of creation: 30 Jun 1998
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Handle: RePEc:wbk:wbrwps:1940
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  1. William T. Dickens & Kevin Lang, 1984. "A Test of Dual Labor Market Theory," NBER Working Papers 1314, National Bureau of Economic Research, Inc.
  2. David Turnham & Deniz Eröcal, 1990. "Unemployment in Developing Countries: New Light on an Old Problem," OECD Development Centre Working Papers 22, OECD Publishing.
  3. Douglas Marcouiller, S.J. & Veronica Ruiz de Castilla & Christopher Woodruff, 1995. "Formal Measures of the Informal Sector Wage Gap in Mexico, El Salvador, and Peru," Boston College Working Papers in Economics 294., Boston College Department of Economics.
  4. John M. Abowd & Henry S. Farber, 1982. "Job queues and the union status of workers," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 35(3), pages 354-367, April.
  5. Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 194-227, May.
  6. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-59, May.
  7. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
  8. Esfahani, Hadi S & Salehi-Isfahani, Djavad, 1989. "Effort Observability and Worker Productivity: Towards an Explanation of Economic Dualism," Economic Journal, Royal Economic Society, vol. 99(397), pages 818-36, September.
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