Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies

Olivier Charlot, Franck Malherbet and Cristina Terra

Cahiers de recherche from CIRPEE

Abstract: This paper studies the impact of product and labor market regulations on the number and size of firms in the formal and informal sectors, as well as on relative wages, relative size of the two sectors and overall unemployment. We show that entry costs in the formal sector tend to make informal firms smaller and more numerous than informal firms, i.e., such costs render the informal sector relatively more competitive. Furthermore, it is possible to reduce informality without increasing unemployment or reducing workers’ wage by reducing entry costs in the formal sector rather than reducing labor market regulations. We also highlight a number of externalities stemming from labor and product market imperfections, allowing the size of those distortions to differ across sectors. We show that, while the so-called overhiring externality takes place in both sectors, this translates into a smaller relative size of the informal sector.

Keywords: Informality; product and labor; market imperfections; firm size (search for similar items in EconPapers)
JEL-codes: E24 E26 J60 L16 O1 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dge, nep-lab, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Product market regulation, firm size, unemployment and informality in developing economies (2011)
Working Paper: Product market regulation, firm size, unemployment and informality in developing economies (2011)
Working Paper: Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1043

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