Informality, public employment and employment protection in developing countries

Shaimaa Yassin and Francois Langot
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Shaimaa Yassin: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, GAINS - Groupe d'Analyse des Itinéraires et des Niveaux Salariaux - UM - Le Mans Université, TEPP - Travail, Emploi et Politiques Publiques - UPEM - Université Paris-Est Marne-la-Vallée - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper proposes an equilibrium matching model for developing countries' labor markets where the interaction between public, formal private and informal private sectors are taken into account. Theoretical analysis shows that gains from reforms aiming at liberalizing formal labor markets can be annulled by shifts in the public sector employment and wage policies. Since the public sector accounts for a substantial share of employment in developing countries, this approach is crucial to understand the main labor market outcomes of such economies. Wages offered by the public sector increase the outside option value of the workers during the bargaining processes in the formal and informal sectors. It becomes more profitable for workers to search on-the-job, in order to move to these more attractive and more stable types of jobs. The public sector therefore acts as an additional tax for the formal private firms. Using data on workers' flows from Egypt, we show empirically and theoretically that the liberalization of labor markets plays against informal employment by increasing the profitability, and hence job creations, of formal jobs. The latter effect is however dampened or even sometimes nullified by the increase of the offered wages in the public sector observed at the same time.

Keywords: Job search; Informality; Public sector; Egypt; Unemployment; Wages; Policy interventions (search for similar items in EconPapers)
Date: 2018-03
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Citations: View citations in EconPapers (4)

Published in Journal of Comparative Economics, 2018, 46 (1), pp.326-348. ⟨10.1016/j.jce.2017.11.006⟩

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Related works:
Journal Article: Informality, public employment and employment protection in developing countries (2018)
Working Paper: Informality, public employment and employment protection in developing countries (2018)
Working Paper: Informality, public employment and employment protection in developing countries (2018)
Working Paper: Informality, Public Employment and Employment Protection in Developing Countries (2017)
Working Paper: Informality, Public Employment and Employment Protection in Developing Countries (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-03959868

DOI: 10.1016/j.jce.2017.11.006

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