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Informal Labor Markets and Macroeconomic Fluctuations

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  • Fiess, Norbert M.
  • Fugazza, Marco
  • Maloney, William F.

Abstract

This paper examines the adjustment of developing country labor markets to macroeconomic shocks. It models a two sector labor market: a formal salaried (tradable) sector that may or may not be affected by union or legislation induced wage rigidities, and an unregulated (nontradable) self-employment sector facing liquidity constraints to entry. This is embedded in a standard small economy macro model that permits the derivation of patterns of comovement among relative salaried/self-employed incomes, salaried/self-employed sector sizes and the real exchange rate with respect to different types of shocks in contexts with and without wage rigidities. The paper then explores time series data from Argentina, Brazil, Colombia and Mexico to test for cointegrating relationships corresponding to the patterns predicted by theory. We identify two types of regime. The first corresponds to periods where demand shocks to the nontradable sector offer new opportunities to (informal) entrepreneurs, the informal sector expands ?procyclically,? and the exchange rate overshoots toward appreciation in the short run, or remains at its productivity determined levels. The second corresponds to periods of negative shocks to the formal salaried sector in the presence of wage rigidities where the sector plays a more traditional ?buffer? role during downturns.

Suggested Citation

  • Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2007. "Informal Labor Markets and Macroeconomic Fluctuations," Proceedings of the German Development Economics Conference, Göttingen 2007 6, Verein für Socialpolitik, Research Committee Development Economics.
  • Handle: RePEc:zbw:gdec07:6529
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Manoel Bittencourt, 2007. "Macroeconomic Performance and Inequality: Brazil 1983-1994," Ibero America Institute for Econ. Research (IAI) Discussion Papers 163, Ibero-America Institute for Economic Research.
    2. Nicoletta Batini & Young-Bae Kim & Paul Levine & Emanuela Lotti, 2009. "Informal Labour and Credit Markets: A Survey," School of Economics Discussion Papers 0609, School of Economics, University of Surrey.
    3. Loayza, Norman V. & Rigolini, Jamele, 2006. "Informality trends and cycles," Policy Research Working Paper Series 4078, The World Bank.
    4. Manoel Bittencourt, 2010. "Financial development and inequality: Brazil 1985–1994," Economic Change and Restructuring, Springer, vol. 43(2), pages 113-130, May.
    5. Bosch, Mariano & Goni, Edwin & Maloney, William, 2007. "The determinants of rising informality in Brazil : Evidence from gross worker flows," Policy Research Working Paper Series 4375, The World Bank.
    6. Manoel BITTENCOURT, 2009. "Macroeconomic Performance And Inequality: Brazil, 1983-94," The Developing Economies, Institute of Developing Economies, vol. 47(1), pages 30-52.
    7. Lahcen, Mohammed Ait, 2014. "DSGE models for developing economies: an application to Morocco," MPRA Paper 63404, University Library of Munich, Germany.
    8. Joanna Tyrowicz & Stanisław Cichocki, 2011. "Employed unemployed? On shadow employment in transition," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(2), pages 259-281, May.
    9. Bosch, Mariano & Maloney, William, 2008. "Cyclical movements in unemployment and informality in developing countries," Policy Research Working Paper Series 4648, The World Bank.
    10. Joanna Tyrowicz & Stanisław Cichocki, 2010. "Employed Unemployed? On Shadow Employment During Transition," Working Papers 2010-05, Faculty of Economic Sciences, University of Warsaw.

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