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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.

Suggested Citation

  • Maloney, William F., 1998. "The structure of labor markets in developing countries : time series evidence on competing views," Policy Research Working Paper Series 1940, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1940

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    References listed on IDEAS

    1. 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 818-836, September.
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    3. Dickens, William T & Lang, Kevin, 1985. "A Test of Dual Labor Market Theory," American Economic Review, American Economic Association, vol. 75(4), pages 792-805, September.
    4. Marcouiller, Douglas & Ruiz de Castilla, Veronica & Woodruff, Christopher, 1997. "Formal Measures of the Informal-Sector Wage Gap in Mexico, El Salvador, and Peru," Economic Development and Cultural Change, University of Chicago Press, vol. 45(2), pages 367-392, January.
    5. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-259, May.
    6. David Turnham & Deniz Eröcal, 1990. "Unemployment in Developing Countries: New Light on an Old Problem," OECD Development Centre Working Papers 22, OECD Publishing.
    7. John M. Abowd & Henry S. Farber, 1982. "Job Queues and the Union Status of Workers," ILR Review, Cornell University, ILR School, vol. 35(3), pages 354-367, April.
    8. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
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    Cited by:

    1. Nikita Céspedes Reynaga, 2015. "Crecer no es Suficiente para Reducir la Informalidad," Working Papers 2015-55, Peruvian Economic Association.
    2. Pham, Thi Hong Hanh, 2017. "Impacts of globalization on the informal sector: Empirical evidence from developing countries," Economic Modelling, Elsevier, vol. 62(C), pages 207-218.
    3. Barrientos, Armando, 2002. "Women, Informal Employment, and Social Protection in Latin America," General Discussion Papers 30557, University of Manchester, Institute for Development Policy and Management (IDPM).
    4. Carlos Humberto Ortiz Quevedo & José Ignacio Uribe García, 2004. "Industrialización, Informalidad Y Comercio Internacional," DOCUMENTOS DE TRABAJO-CIDSE 002841, UNIVERSIDAD DEL VALLE - CIDSE.
    5. Fabio Veras Soares, 2004. "Some Stylized Facts Of The Informal Sector In Brazil In The Last Two Decades," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 142, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    6. Jäckle, Annette E & Li, Carmen A, 2003. "Firm Dynamics and Institutional Participation: A Case Study on Informality of Micro-Enterprises in Peru," Economics Discussion Papers 3620, University of Essex, Department of Economics.
    7. N Fiess & M Fugazza & WF Maloney, 2006. "Informal Labor Markets and Macroeconomic Fluctuations," Working Papers 2006_17, Business School - Economics, University of Glasgow.
    8. Olivier Bargain & Prudence Kwenda, 2010. "Is informality bad? Evidence from Brazil, Mexico and South Africa," Working Papers 201003, School of Economics, University College Dublin.
    9. José Ignacio Uribe García & Carlos Humberto Ortíz Quevedo, 2004. "Una Propuesta De Conceptualización Y Medición Del Sector Informal," DOCUMENTOS DE TRABAJO-CIDSE 003720, UNIVERSIDAD DEL VALLE - CIDSE.


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