Workforce Composition, Productivity, and Labor Regulations in a Compensating Differentials Theory of Informality

Daniel Haanwinckel and Rodrigo Soares

No 9951, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We develop a search model of informal labor markets with worker and firm heterogeneity, intra-firm bargaining with imperfect substitutability across types of workers, and a comprehensive set of labor regulations, including minimum wage. Stylized facts associated with the informal sector, such as smaller firms and lower wages, emerge endogenously as firms and workers decide whether to comply with regulations. Imperfect substitutability across types of workers and decreasing returns to scale enable the model to reproduce empirical patterns incompatible with existing frameworks in the literature: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, and the declining formal wage premium by skill level. These features also allow us to analyze the equilibrium responses to changes in the demand and supply of different types of labor. We estimate the model using Brazilian data and show that it closely reproduces the decline in informality observed between 2003 and 2012. The change in the composition of the labor force appears as the main driving force behind this phenomenon. We illustrate the use of the model for policy analysis by assessing the effectiveness of a progressive payroll tax in reducing informality.

Keywords: informality; labor market; search; minimum wage; compensating differentials; Brazil (search for similar items in EconPapers)
JEL-codes: J24 J31 J46 J64 O17 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2016-05
New Economics Papers: this item is included in nep-dge, nep-hrm, nep-iue and nep-lma
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published - published in: Review of Economic Studies, 2021, 88 (6), 2970-3010

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Related works:
Journal Article: Workforce Composition, Productivity, and Labour Regulations in a Compensating Differentials Theory of Informality (2021)
Working Paper: Workforce Composition, Productivity, and Labor Regulations in a Compensating Differentials Theory of Informality (2020)
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