Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies

Olivier Charlot, Franck Malherbet and Cristina Terra

No 5519, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper studies the impact of product and labor market regulations on informality and unemployment in a general framework where formal and informal firms are subject to the same externalities, differing only with respect to some parameter values. Both formal and informal firms have monopoly power in the goods market, they are subject to matching friction in the labor market, and wages are determined through bargaining between large firms and their workers. The informal sector is found to be endogenously more competitive than the formal one. We find that lower strictness of product or labor market regulations lead to a simultaneous reduction in informality and unemployment. The difference between these two policy options lies on their effect on wages. Lessening product market strictness increases wages in both sector but also increases the formal sector wage premium. The opposite is true for labor market regulation. Finally, we show that the so-called overhiring externality due to wage bargaining translates into a smaller relative size of the informal sector.

Keywords: firm size; informality; product and labor market imperfections (search for similar items in EconPapers)
JEL-codes: E24 E26 J60 L16 O1 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011-02
New Economics Papers: this item is included in nep-lab, nep-mac and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published - published as 'Informality in developing economies: regulation and fiscal policies' in: Journal of Economic Dynamics and Control, 2015, 51, 1–27

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Related works:
Working Paper: Product market regulation, firm size, unemployment and informality in developing economies (2011)
Working Paper: Product market regulation, firm size, unemployment and informality in developing economies (2011)
Working Paper: Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies (2010)
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