Workforce Composition, Productivity, and Labor Regulations in a Compensating Differentials Theory of Informality

Daniel Haanwinckel and Rodrigo Soares

No 2020-45, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We develop a search model of informal labor markets with worker and firm heterogeneity, intra-firm bargaining with imperfect substitutability across types of workers, and a comprehensive set of labor regulations, including minimum wage. Stylized facts associated with the informal sector, such as smaller firms and lower wages, emerge endogenously as firms and workers decide whether to comply with regulations. Imperfect substitutability across types of workers, decreasing returns to scale, and convex vacancy-posting costs enable the model to reproduce empirical patterns incompatible with existing frameworks in the literature: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, the declining formal wage premium by skill, and the rising firm-size wage premium by skill. These features also allow us to analyze the equilibrium responses to changes in the demand and supply of different types of labor. We estimate the model using Brazilian data and show that it reproduces various margins of labor market changes observed between 2003 and 2012. The change in the composition of the labor force appears as the main driving force behind the reduction in informality. We illustrate the use of the model for policy analysis by assessing the effectiveness of a progressive payroll tax in reducing informality.

Keywords: informality; labor market; search; minimum wage; compensating differentials; Brazil (search for similar items in EconPapers)
JEL-codes: J24 J31 J46 J64 O17 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-hrm and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Workforce Composition, Productivity, and Labour Regulations in a Compensating Differentials Theory of Informality (2021)
Working Paper: Workforce Composition, Productivity, and Labor Regulations in a Compensating Differentials Theory of Informality (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bfi:wpaper:2020-45

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