Trade and Informality in the Presence of Labor Market Frictions and Regulations

Rafael Dix-Carneiro, Pinelopi Goldberg, Costas Meghir () and Gabriel Ulyssea ()
Additional contact information
Costas Meghir: Yale University
Gabriel Ulyssea: University College London

No 14060, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an "unemployment," but not a "welfare buffer" in the event of negative economic shocks.

Keywords: regulations; trade; informality; labor market frictions (search for similar items in EconPapers)
JEL-codes: F14 F16 J46 O17 (search for similar items in EconPapers)
Pages: 109 pages
Date: 2021-01
New Economics Papers: this item is included in nep-dge, nep-iue, nep-lam and nep-lma
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Citations: View citations in EconPapers (47)

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Related works:
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and informality in the presence of labor market frictions and regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2021)
Working Paper: Trade and Informality in the Presence of Labor Market Frictions and Regulations (2019)
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