Exchange rate appreciations, labor market rigidities, and informality

Marco Fugazza (), Norbert Fiess and William Maloney

No 2771, Policy Research Working Paper Series from The World Bank

Abstract: This paper works at the interface of the literature exploring the raison d'etre of the informal labor market and that explaining the real exchange rate appreciations occurring in many Latin American countries during periods of reform. The authors first build a small country-Australian style model where the informal sector is seen as an unregulated non-tradables sector, augmented by heterogeneity in entrepreneurial ability and capital adjustment costs. They then examine the behavior of the model with and without a formal sector rigidity. It shows that the co-movements of relative formal/informal incomes, formal/informal sector size, and the real exchange rate can offer insight into the level of distortion in the labor market and the source of exchange rate fluctuations. The paper then explores time series data from Brazil, Colombia and Mexico using multivariate co-integration techniques to establish what"regime"each country is in at various periods of time. Mexico appears to be relatively undistorted and the 1987-92 appreciation appears to be largely a function of a boom in the non-tradables sector rather than wage inertia. In spite of a secular expansion of the informal sector there is little evidence of dualism or of a rigidity driven appreciation of the Real, from 1993-1996. Post 1995 Colombia corresponds to a classic segmented labor market and an appreciation partly driven by labor market rigidities. Graphical analysis suggests that neither the Argentine appreciation (1988-1992) or the celebrated Chilean appreciation (1975-1982) were driven by inertial forces

Keywords: Labor Policies; Environmental Economics&Policies; Banks&Banking Reform; Economic Theory&Research; Fiscal&Monetary Policy; Environmental Economics&Policies; Economic Theory&Research; Economic Stabilization; Macroeconomic Management; Banks&Banking Reform (search for similar items in EconPapers)
Date: 2002-02-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... ered/PDF/wps2771.pdf (application/pdf)

Related works:
Working Paper: Exchange Rate Appreciations, Labor Market Rigidities, and Informality (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:2771

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().