The implications of capital-skill complementarity in economies with large informal sectors

Pedro S. Amaral () and Erwan Quintin

No 404, Center for Latin America Working Papers from Federal Reserve Bank of Dallas

Abstract: In most developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that such barriers are important. This paper describes a model where significant differences arise between formal and informal workers even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.

Keywords: Labor; market (search for similar items in EconPapers)
Date: 2004
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Working Paper: The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:fip:feddcl:0404

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