American Economic Review Vol. 105 No. 4 2015

Wages and Informality in Developing Countries

Costas Meghir¹; Renata Narita²; Jean–Marc Robin³

¹ Department of Economics, Yale University, 37 Hillhouse Avenue, New Haven, CT 06511, IFS, and NBER (e-mail: ) · ² Department of Economics, University of Sao Paulo, Avenida Professor Luciano Gualberto 908, Sao Paulo, SP, Brazil 05508-010 (e-mail: ) · ³ Sciences Po, Office E410, 28 Rue des Saints-Pères, 75007 Paris, France, and UCL (e-mail: )

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.

DOI

10.1257/aer.20121110

Volume

105

Issue

4

Pages

1509-1546

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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