Informality and Macroeconomic Fluctuations

51 Pages Posted: 5 Jun 2008

See all articles by Norbert Fiess

Norbert Fiess

Independent

Marco Fugazza

United Nations - Trade Analysis Branch

William F. Maloney

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

Date Written: May 2008

Abstract

This paper examines the adjustment of developing country labor markets to macroeconomic shocks. It models as having two sectors: a formal salaried (tradable) sector that may or may not be affected by union or legislation induced wage rigidities, and an informal (nontradable) self-employment sector facing liquidity constraints to entry. This is embedded in a standard small economy macro model that permits the derivation of patterns of comovement among relative salaried/self-employed incomes, salaried/self-employed sector sizes and the real exchange rate with respect to different types of shocks in contexts with and without wage rigidities. The paper then explores time series data from Argentina, Brazil, Colombia and Mexico to test for cointegrating relationships corresponding to the patterns predicted by theory. We confirm episodes of expansion of informal self-employment consistent with the traditional segmentation views. However, we also identify episodes consistent with the sectoral expansion being driven by relative demand or productivity shocks to the nontradables sector that lead to "procyclical" behavior of the informal self-employed sector.

Keywords: informality, labor market dynamics, self-employment, real exchange rates

JEL Classification: F41, J21, J24, J31, O17

Suggested Citation

Fiess, Norbert and Fugazza, Marco and Maloney, William F., Informality and Macroeconomic Fluctuations (May 2008). IZA Discussion Paper No. 3519. Available at SSRN: https://ssrn.com/abstract=1139909 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Norbert Fiess (Contact Author)

Independent ( email )

No Address Available

Marco Fugazza

United Nations - Trade Analysis Branch ( email )

Palais des Nations
Office E 8074
Geneva, 1211
Switzerland

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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