Working Paper: CEPR ID: DP5515
Authors: Mathan Satchi; Jonathan Temple
Abstract: In middle-income countries, the informal sector often accounts for a substantial fraction of urban employment. We develop a general equilibrium model with matching frictions in the urban labour market, the possibility of selfemployment in the informal sector, and scope for rural-urban migration. We investigate the effects of different types of growth on wages and the informal sector, and the extent to which labour market institutions can influence aggregate productivity. We quantify these effects by calibrating the model to data for Mexico, a country with a sizeable informal sector and significant labour market rigidities.
Keywords: Dual economies; Informal sector; Matching frictions; Urban unemployment
JEL Codes: J40; O10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| urban growth (R11) | wages (J31) |
| urban growth (R11) | informal sector employment (J46) |
| agricultural growth (O13) | urban formal sector (R38) |
| labour market institutions (J08) | sectoral structure (L16) |
| labour market institutions (J08) | aggregate productivity (E23) |
| matching frictions (F12) | underemployment (J64) |
| improving matching efficiency (C78) | unemployment (J64) |
| improving matching efficiency (C78) | wages (J31) |