Cyclical Movements in Unemployment and Informality in Developing Countries

53 Pages Posted: 5 Jun 2008

See all articles by Mariano Bosch

Mariano Bosch

London School of Economics & Political Science (LSE)

William F. Maloney

World Bank - Poverty and Economic Management Unit; IZA Institute of Labor Economics; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2008

Abstract

This paper analyzes the cyclical properties of worker flows in Brazil and Mexico, two important developing countries with large unregulated or "informal" sectors. It generates three stylized facts that are critical to the accurate modeling of the sector and which suggest the need to rethink the approaches to date. First, the unemployment rate is countercyclical essentially because job separations of informal workers increase dramatically in recessions. Second, the share of formal employment is countercyclical because of the difficulty of finding formal jobs from inactivity, unemployment and other informal jobs during recessions rather than because of increased separation from formal jobs. Third, flows from formality into informality are not countercyclical, but, if anything, pro-cyclical. Together, these challenge the conventional wisdom that has guided the modeling the sector that informal workers are primarily those rationed out of the formal labor market. They also offer a new synthesis of the mechanics of the cyclical adjustment process. Finally, the paper offers estimates of the moments of worker flows series that are needed for calibration.

Keywords: gross worker flows, labor market dynamics, informality, developing countries

JEL Classification: J41, J42, J6

Suggested Citation

Bosch, Mariano and Maloney, William F., Cyclical Movements in Unemployment and Informality in Developing Countries (May 2008). IZA Discussion Paper No. 3514. Available at SSRN: https://ssrn.com/abstract=1139904 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Mariano Bosch (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

William F. Maloney

World Bank - Poverty and Economic Management Unit ( email )

1818 H Street NW
Washington, DC 20433
United States
202-473-6340 (Phone)
202-522-0054 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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