The Effects of Labour Market Policies in an Economy with an Informal Sector

Abstract

In this article, we build an equilibrium search and matching model of an economy with an informal sector. Our model extends Mortensen and Pissarides (1994) by allowing for "ex ante" worker heterogeneity with respect to formal-sector productivity. We use the model to analyse the effects of labour market policy on informal-sector and formal-sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, we examine the distributional implications of labour market policy; specifically, we analyse how labour market policy affects the distributions of wages and productivities across formal-sector matches. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data

“…They may also balance these bene…ts against the possibility to avoid taxes in the informal sector (Maloney, 1999). 3 Notwithstanding, several interesting studies show that the dual representation of the informal sector proves to be a better alternative than polar models (see in particular Cunningham and Maloney, 2001, and Guenther and Launov, 2006). estimation of the wage gap at the mean, which may su¤er from heteroscedasticity and fail to capture important information.…”

“…While such a dual representation is convenient for modeling purposes, the informal sector is likely to present a high degree of heterogeneity. 3 As a result, the informal wage gap may change gradually along the wage distribution or with workers'attributes. Recent empirical contributions thus depart from simple 1 Evidence of voluntary selection into the informal sector has been particularly compelling for Latin America and for self-employed workers.…”

Informality, public employment and employment protection in developing countries

“…A worker's employment/unemployment choices are therefore based on the comparisons between his/her expected job values in the current or all the prospective jobs i.e in any of the three employment sectors. There have been recent attempts to include within the DMP model an informal sector (such as Albrecht et al (2009), Meghir et al (2015), Bosch and EstebanPretel (2012), Charlot et al (2013Charlot et al ( , 2014 and Charlot et al (2015)) or a public sector and an unsegmented private sector (such as Burdett (2012) , Postel-Vinay et al (2016)). In this paper, we aim to add both an informal and a public sector to the Mortensen and Pissarides (1994) model, with jobto-job transitions towards the public sector 7 .…”

Risk attitudes and informal employment in a developing economy

“…Similarly, the results of the search-and-matching literature on informality would be modified if risk aversion were taken into account. For example, in the model of Albrecht et al (2009) workers who are relatively productive in formal-sector employment reject informal job offers to wait for a formal-sector job. But if risk aversion were allowed for, these workers might not take the risk of rejecting the informal job offer.…”

“…In the seminal paper by Rauch (1991), which is an adaptation of the Lucas (1978) formulation of firm size-distribution to informal labour markets, the focus is on the heterogeneity of agents' (entrepreneurial) ability, but there is no allowance for risk aversion. 1 In the informality literature based on search-and-matching theory the risk of not being able to find a job is a central feature, but workers are assumed risk neutral (see, e.g., Zenou 2008; Albrecht et al 2009). http://www.izajold.com/content/1/1/5…”