Trade and informality in the presence of labor market frictions and regulations

Rafael Dix-Carneiro, Pinelopi Goldberg, Costas Meghir () and Gabriel Ulyssea
Additional contact information
Costas Meghir: Institute for Fiscal Studies and Yale University
Gabriel Ulyssea: Institute for Fiscal Studies

No W21/02, IFS Working Papers from Institute for Fiscal Studies

Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an “unemployment," but not a “welfare buffer" in the event of negative economic shocks.

Date: 2021-01-21
New Economics Papers: this item is included in nep-dge, nep-his, nep-int, nep-iue, nep-lam and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
https://ifs.org.uk/uploads/WP202102-Trade-and-info ... -and-regulations.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ifs:ifsewp:21/02

Ordering information: This working paper can be ordered from
The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

Access Statistics for this paper

More papers in IFS Working Papers from Institute for Fiscal Studies The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE. Contact information at EDIRC.
Bibliographic data for series maintained by Emma Hyman ().