Informal labor market and access to education in developing economies

Therese Rebiere

No 2861, EcoMod2011 from EcoMod

Abstract: This paper studies the impact of access to education in a search and matching model of the labor market representing a developping economy. It then addresses the issue of the impact on the market efficiency of public policies aiming at increasing education. Developing economies are well known for having a large pool of uneducated (low-productive) workers in the informal sector whereas the formal sector captures almost all educated (higher-productive) workers. Access to education may therefore distort the structure of the labor market and thus global output.To address this issue, we consider a segmented labor market with a formal sector and an informal sector. 3 states coexists: unemployment, formal employment and informal employment. Uneducated workers are forced to apply to the informal sector whereas educated workers may apply in both sectors depending on model specifications. The formal sector is subject to market frictions whereas the competitive wage clears the informal labor market. Unemployment thus only exists in the formal sector and acts as a pool of entry to formal employment. Informal employees may possibly search on-the-job for a formal job. This last feature of the model implies that modifying access to education distorts the repartition of workers in the labor market. Two assumptions are made: first, education is increased by external intervention (international subvention to education). Second, education is self-financed by taxes paid by the formal sector (the local government faces a budget constraint). We compare the decentralized equilibrium situation to the social planner equilibrium.Without any foundings consideration, 1) increasing education raises the number of workers applying in the formal sector. In the presence of search frictions in this sector, the probability of obtaining a formal job is reduced as well as formal job wages. 2) The asset values of informal and formal workers are getting closer which discourages informal on-the-job seeker to look for a formal job. The two impacts leads to opposite effect on informality. Further results on efficiency are on the run.

Keywords: Theoretical model of developing economies: no specific country; Labor market issues; Developing countries (search for similar items in EconPapers)
Date: 2011-07-06
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Persistent link: https://EconPapers.repec.org/RePEc:ekd:002625:2861

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