Working Paper: CEPR ID: DP17195
Authors: Douglas Amuli Ibale; Frdric Docquier; Zainab Iftikhar
Abstract: We build a two-sector model with labor market frictions to explain income disparities between provinces, sectors (formal vs. informal), and skill groups (skilled vs. unskilled) in the Democratic Republic of the Congo. We then parameterize the model to match observed income and employment data. We conduct a set of counterfactual “policy” experiments, to analyze the role of technologies, human capital, infrastructure, and labor market frictions in explaining spatial and within-province inequalities. We highlight strong "O-ring'' inequality patterns, implying that successful development policies involve a combination of coordinated policy actions. While spatial inequalities are mostly determined by technological disparities, a development policy that disregards the informal sector has anti-redistributive effects. Taken in isolation, policies targeting education, infrastructure, and labor market frictions can increase inequality and poverty, at least along the intensive margin.
Keywords: Informality; Inequality; Labor Market Frictions; Oring Theory of Development
JEL Codes: O15; F22; I11; C23; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technological disparities (O33) | spatial inequalities (R12) |
| Stimulating total factor productivity (TFP) in the formal sector (O49) | average incomes (D31) |
| Boosting TFP in the informal sector (O17) | aggregate gains for low-skilled workers (J39) |
| Development policies ignoring the informal sector (O17) | exacerbate income inequality and extreme poverty (F63) |
| Policies targeting education and infrastructure (H52) | negatively impact the informal sector (O17) |
| Policies targeting education and infrastructure (H52) | adversely affecting unskilled workers' incomes (F66) |
| Low mobility of unskilled workers across sectors (J69) | limited effectiveness of policies (F68) |