Informality and the Labor Market Effects of Financial Crises

Emilio Colombo, Lorenzo Menna () and Patrizio Tirelli

No dis1801, DISEIS - Quaderni del Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo from Università Cattolica del Sacro Cuore, Dipartimento di Economia internazionale, delle istituzioni e dello sviluppo (DISEIS)

Abstract: We provide evidence, based on a large sample of countries, on the effects of financial crises on key labor market indicators, including official and unofficial employment, unemployment and the participation rate. Crises are followed by a drop in the official market participation rate and by an increase in informal employment. These responses are strongly persistent. Empirical results are then interpreted with a DSGE model which accounts for informality and for financial and labor market frictions. In this framework the informal sector acts as a buffer which absorbs workers in bad times and vice versa. Our simulations suggest the informal sector also is a crisis amplifier for the official economy. In fact, the larger the pre-crisis informal sector, the stronger the labor reallocation, i.e. the fall in the participation rate, necessary to equilibrate the labor market.

JEL-codes: E26 E32 G01 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-dge, nep-iue and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Informality and the labor market effects of financial crises (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:dis:wpaper:dis1801

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