Working Paper: NBER ID: w18347
Authors: Costas Meghir; Renata Narita; Jean-Marc Robin
Abstract: It is often argued that informal labor markets in developing countries promote growth by reducing the impact of regulation. On the other hand informality may reduce the amount of social protection offered to workers. We extend the wage-posting framework of Burdett and Mortensen (1998) to allow heterogeneous firms to decide whether to locate in the formal or the informal sector, as well as set wages. Workers engage in both off the job and on the job search. We estimate the model using Brazilian micro data and evaluate the labor market and welfare effects of policies towards informality.
Keywords: Wages; Informality; Labor Markets; Developing Countries
JEL Codes: J24; J3; J42; J6; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the cost of informality by 10% (J46) | Improves overall welfare (D69) |
| Higher costs (G19) | Increased competition among formal sector firms (L19) |
| Increased competition among formal sector firms (L19) | Raises wages for all workers (J38) |
| Firms remaining informal (L20) | Benefit from increased profit margins (L21) |
| Abolishing informality (J46) | Substantial increase in workers' welfare (J38) |
| Abolishing informality (J46) | Provides access to more valuable formal jobs (J24) |
| Abolishing informality (J46) | Increases competition for labor (J49) |
| Increased competition for labor (J69) | Drives up formal sector wages (J39) |
| Abolishing informality (J46) | Effect on average firm profits is ambiguous (D21) |