Exclusive Goods and Formal-Sector Employment

Reto Foellmi and Josef Zweimüller ()

American Economic Journal: Macroeconomics, 2011, vol. 3, issue 1, 242-72

Abstract: We explore how the underemployment problem of less-developed economies is related to income inequality. Consumers have nonhomothetic preferences over differentiated products of formal-sector goods and thus inequality affects the composition of aggregate demand via the price-setting behavior of firms. We find that high inequality divides the formal sector into mass producers and exclusive producers (which serve only the rich); high inequality generates an equilibrium where many workers are crowded into the informal economy; and an increase in subsistence productivity raises the unskilled workers' wages and boosts employment due to the higher purchasing power of poorer households. (JEL D31, D43, E24, E26, J24)

JEL-codes: D31 D43 E24 E26 J24 (search for similar items in EconPapers)
Date: 2011
Note: DOI: 10.1257/mac.3.1.242
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Citations: View citations in EconPapers (4)

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