Wages and Informality in Developing Countries

Costas Meghir, Renata Narita and Jean-Marc Robin
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Costas Meghir: Economics department - MIT - Massachusetts Institute of Technology

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Abstract: We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market.

Keywords: Equilibrium wage-posting model; Brazilian labor; Formal labor market (search for similar items in EconPapers)
Date: 2015-04
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03587627v1
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Citations: View citations in EconPapers (18)

Published in American Economic Review, 2015, 105 (4), pp.1509 - 1546. ⟨10.1257/aer.20121110⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03587627

DOI: 10.1257/aer.20121110

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