Labor share, informal sector and development

Paul Maarek

MPRA Paper from University Library of Munich, Germany

Abstract: This paper aims to understand the pattern of the labor share of income during the development process. We highlight a U-shapped relationship between development and the labor share. Our theory emphasizes the interplay between firms'monopsony power and the size of the informal sector when the formal labor market has frictions. The size of the informal sector parameterizes workers'outside opportunities in wage setting. In the first stage of development, productivity gains are not compensated by wage increases, as most of workers'outside opportunities depend on the informal sector whose productivity remains unchanged. The labor share decreases as a result. In the second stage of development, outside opportunities rely more on productivity in formal firms as the formal sector expands. Consequently, the labor share increases. We then use a policy experiment, namely capital account liberalization episodes, in order to determine the causal impact of economic development on the labor share.

Keywords: Development; Informal sector; Labor share; Matching frictions (search for similar items in EconPapers)
JEL-codes: E25 J42 O17 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-iue, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Labor share, Informal sector and Development (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:38756

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