Informality and Macroeconomic Fluctuations

Norbert Fiess, Marco Fugazza () and William Maloney

No 3519, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper examines the adjustment of developing country labor markets to macroeconomic shocks. It models as having two sectors: a formal salaried (tradable) sector that may or may not be affected by union or legislation induced wage rigidities, and an informal (nontradable) self-employment sector facing liquidity constraints to entry. This is embedded in a standard small economy macro model that permits the derivation of patterns of comovement among relative salaried/self-employed incomes, salaried/self-employed sector sizes and the real exchange rate with respect to different types of shocks in contexts with and without wage rigidities. The paper then explores time series data from Argentina, Brazil, Colombia and Mexico to test for cointegrating relationships corresponding to the patterns predicted by theory. We confirm episodes of expansion of informal self-employment consistent with the traditional segmentation views. However, we also identify episodes consistent with the sectoral expansion being driven by relative demand or productivity shocks to the nontradables sector that lead to “procyclical” behavior of the informal self-employed sector.

Keywords: informality; labor market dynamics; self-employment; real exchange rates (search for similar items in EconPapers)
JEL-codes: F41 J21 J24 J31 O17 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2008-05
New Economics Papers: this item is included in nep-cba, nep-dev, nep-ent, nep-lab, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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