Globalization and Formal-Informal Wage Gap

Hend Ghazzai and Rim Lahmandi-Ayed
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Hend Ghazzai: South Mediterranean University, Mediterranean School of Business

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Abstract: In this paper, we investigate the effect of globalization on the wage gap between informal and formal workers. We assume in our model that formal products are perceived of better quality than informal ones, while requiring higher efforts. Moreover formal firms have to pay social contributions on each worker, while informal firms do not have to. We consider two opposite regimes: Autarky and Full Integration. Under each regime we fully characterize the equilibrium of a game where firms choose their status and quantities to be produced. We then calculate the formal and informal workers wages at equilibrium. First we prove that globalization raises all wages. Second we prove that globalization raises more (less) the formal workers' wages for high (low) quality gap/low(high) social contributions relative the informal workers' wages.

Keywords: Globalization; Informality; Quality gap; Wage gap (search for similar items in EconPapers)
Date: 2023-12-21
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