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Labor share, Informal sector and Development

Paul Maarek ()

No 2012-34, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper aims to understand the pattern of the labor share of income during the development process. We highlight a U-shaped relationship between development and the labor share. Our theory emphasizes the interplay between firms' monopsony power and the size of the informal sector when the formal labor market has frictions. The size of the informal sector parameterizes workers' outside opportunities in wage setting. In the first stage of development, productivity gains are not compensated by wage increases, as most of workers' outside opportunities depend on the in- formal sector whose productivity remains unchanged. The labor share decreases as a result. In the second stage of development, outside opportunities rely more on productivity in formal firms as the formal sector expands. Consequently, the labor share increases. We then use a policy experiment, namely capital account liberalization episodes, in order to determine the causal impact of economic development on the labor share.

Keywords: Development; Informal sector; Labor share; Matching frictions (search for similar items in EconPapers)
JEL-codes: E25 J42 O17 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-dev, nep-iue, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

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