Working Paper: CEPR ID: DP15726
Authors: Rafael Dixcarneiro; Pinelopi Goldberg; Costas Meghir; Gabriel Ulyssea
Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an “unemployment,” but not a “welfare buffer” in the event of negative economic shocks.
Keywords: No keywords provided
JEL Codes: F14; F16; J46; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade openness (F43) | informality in the tradable sector (J46) |
| Trade openness (F43) | productivity gains (O49) |
| Informality omitted (Y20) | understated productivity gains (O49) |
| Trade openness (F43) | welfare gains (D69) |
| Repressing informality (O17) | productivity (O49) |
| Repressing informality (O17) | employment (J68) |
| Repressing informality (O17) | welfare (I38) |
| Informal sector included (J46) | effects of trade on wage inequality (F66) |
| Informal sector (J46) | unemployment buffer (J65) |
| Repressing informality (O17) | unemployment (J64) |
| Lower informality (J46) | welfare (I38) |