Analyzing the Impact of Informal Labor Sector Regulation in the Context of International Trade: A Theoretical Approach

Hernández-Luna Yezid ()
Additional contact information
Hernández-Luna Yezid: Aix-Marseille School of Economics AMSE, Economic Studies Group Coordinator at the Superintendence of Industry and Commerce of Colombia, Bogota, Colombia

Journal of Globalization and Development, 2024, vol. 15, issue 1, 63-94

Abstract: I analyze the relationship between international trade and welfare using a theoretical model of heterogeneous firms with a labor market segregated between informal and formal firms. The segregation in this case is a result of the introduction in the market of a regulatory threshold, according to which firms having less than a certain quantity of workers are defined as informal, otherwise they are formal and should pay additional fixed and marginal labor costs. This threshold creates a situation where it is endogenously more profitable for the most productive informal firms to scale back production to avoid formal labor costs. The numerical solution of the model shows that, after trade openness, a share of the most productive informal firms become less productive informal, and that the less productive formal firms become most productive informal. The welfare in the economy decreases because of the shrinking of firms, the higher prices, and the reduction of available varieties. Likewise, the comparative static exercise yields evidence that a decrease in the regulatory threshold forces informal firms to become formal; therefore, under full employment conditions, such a policy increases all average wages and raises welfare.

Keywords: informal labor; international trade; heterogeneous firms; labor market regulation (search for similar items in EconPapers)
JEL-codes: F12 F16 J38 J46 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/jgd-2023-0070 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:globdv:v:15:y:2024:i:1:p:63-94:n:1003

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/jgd/html

DOI: 10.1515/jgd-2023-0070

Access Statistics for this article

Journal of Globalization and Development is currently edited by Joseph E. Stiglitz, Kevin Gallagher, Jeronim Capaldo, Arjun Jayadev, José Antonio Ocampo and Dani Rodrik

More articles in Journal of Globalization and Development from De Gruyter
Bibliographic data for series maintained by Peter Golla ().