Labor Market Search, Informality and Schooling Investments

Abstract

work is licensed under a Creative Commons IGO 3.0 AttributionNonCommercial-NoDerivatives (CC-IGO BY-NC-ND 3.0 IGO) license (http://creativecommons.org/licenses/by-nc-nd/3.0/igo/ legalcode) and may be reproduced with attribution to the IDB and for any non-commercial purpose, as provided below. No derivative work is allowed.Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC-IGO license.Following a peer review process, and with previous written consent by the Inter-American Development Bank (IDB), a revised version of this work may also be reproduced in any academic journal, including those indexed by the American Economic Association's EconLit, provided that the IDB is credited and that the author(s) receive no income from the publication. Therefore, the restriction to receive income from such publication shall only extend to the publication's author(s). With regard to such restriction, in case of any inconsistency between the Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives license and these statements, the latter shall prevail.Note that link provided above includes additional terms and conditions of the license.The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.http://www.iadb.org 2018 AbstractThis paper develops a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether to search for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. The paper focuses on an increasingly important institution: a "dual" social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. Preferences are estimated for the system-together with all the other structural parameters of the labor market-using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost similar to that generated by the current system. JEL classifications: J24, J3, J64, O17

Informality: Causes and Consequences for Development

“…Their results show that differences in perceived returns (pecuniary and nonpecuniary) explain most of the sorting between sectors (as opposed to potential barriers to workers' mobility), and that returns are higher in the formal sector for high-skill individuals. Moreover, similarly to work by Bobba et al (2017), their results indicate that the interactions between schooling and formal/informal labor supply decisions have important implications for the analysis of formalization policies, as I discuss in the next section.…”

“…This section starts by reviewing the literature on the firm-level effects of formalization and then proceeds to a discussion of more aggregate effects. The latter relies on an extensive macro literature but also on a fairly recent but growing structural literature that integrates both micro and macro effects (Meghir et al 2015;Bobba et al 2017Bobba et al , 2019Ulyssea 2018). The aggregate consequences are organized according to the two broad sets of determinants mentioned in the introduction: those that increase the costs (decrease the benefits) of informality and those that decrease the costs (increase the benefits) of formality.…”

“…Fourth, such policy may change occupational choices and discourage low-skill individuals to self-select into informal entrepreneurship, therefore increasing labor supply (e.g., Ordonez 2014, López 2017. Fifth, the policy may prompt higher investments in human capital, both before entering the labor market (i.e., formal schooling) and through on-the-job accumulation (Bobba et al 2017(Bobba et al , 2019. 16 It is worth noting that the point estimates in these studies are often large but very imprecisely estimated.…”

Persistent Misallocation and the Returns to Education in Mexico

“…Bobba, Flabbi, and Levy (2017) develop a search and bargaining model where firms and workers form matches (jobs) that can be formal or informal. Modeling some of the distortions present in Mexico's labor market, they show that the returns to education follow a path consistent with the findings in this paper, with the additional effect of a disincentive for individuals to invest in higher levels of education.…”

Career Choices and the Evolution of the College Gender Gap

“…Our paper is related to a recent and growing literature studying how human capital investment decisions are a ected by plausibly exogenous changes in labor market opportunities (see Bobba, Flabbi, and Levy, 2012, for a recent overview).…”