The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors

Pedro S. Amaral () and Erwan Quintin
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Erwan Quintin: Federal Reserve Bank of Dallas

Macroeconomics from EconWPA

Abstract: In most developing nations, formal workers tend to be more experienced and educated than informal workers, a fact often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that labor markets are segmented in those nations. This paper describes a model where significant differences arise between workers across sectors 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. We argue that subsidiary implications of the model for the organization of production are borne out by the existing evidence on informal economic activities in developing countries.

JEL-codes: O17 L23 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-dge and nep-lam
Date: Written 2003-09-23
Note: Type of Document - ; pages: 30
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Related works:
Working Paper: The implications of capital-skill complementarity in economies with large informal sectors (2004)
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