Cyclical Movements in Unemployment and Informality in Developing Countries

Mariano Bosch and William Maloney

No 3514, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper analyzes the cyclical properties of worker flows in Brazil and Mexico, two important developing countries with large unregulated or “informal” sectors. It generates three stylized facts that are critical to the accurate modeling of the sector and which suggest the need to rethink the approaches to date. First, the unemployment rate is countercyclical essentially because job separations of informal workers increase dramatically in recessions. Second, the share of formal employment is countercyclical because of the difficulty of finding formal jobs from inactivity, unemployment and other informal jobs during recessions rather than because of increased separation from formal jobs. Third, flows from formality into informality are not countercyclical, but, if anything, pro-cyclical. Together, these challenge the conventional wisdom that has guided the modeling the sector that informal workers are primarily those rationed out of the formal labor market. They also offer a new synthesis of the mechanics of the cyclical adjustment process. Finally, the paper offers estimates of the moments of worker flows series that are needed for calibration.

Keywords: gross worker flows; labor market dynamics; informality; developing countries (search for similar items in EconPapers)
JEL-codes: J41 J42 J6 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2008-05
New Economics Papers: this item is included in nep-dev, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (86)

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Working Paper: Cyclical movements in unemployment and informality in developing countries (2008)
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