Cheaper AI, More Informality? A Dual Labor Market Model for Developing Economies

Gabriel Montes-Rojas, Fernando Toledo and Juan Manuel Rodríguez Repeti
Additional contact information
Gabriel Montes-Rojas: IIEP-UBA/CONICET
Fernando Toledo: UNLP
Juan Manuel Rodríguez Repeti: IIEP-UBA

No 401, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: This paper studies what happens when AI gets cheaper, with emphasis on the labor market outcomes, whether it creates formal jobs or whether it pushes workers into informality. We argue that the answer depends on the elasticity of substitution between imported AI capital and formal labor. We build a small open economy DSGE model with a dual labor market, imported AI capital, and country risk, calibrated to an economy where informality is pervasive. The same decline in AI prices produces sharply different labor-market outcomes depending on whether AI substitutes or complements formal workers. Under substitution, cheaper AI weakens formal labor demand and increases the role of the informal sector as an employment buffer. Under complementarity, it expands formal employment and amplifies output, wages, investment, and capital accumulation. The model therefore shows that AI can become either a source of displacement pressure or a driver of formal-sector expansion, depending on how it interacts with human labor.

Keywords: Artificial Intelligence; Informal Economy; Dual Labor Markets; DSGE; Latin America (search for similar items in EconPapers)
JEL-codes: C68 E26 F41 J46 O33 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-07
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:401

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