Informality, Public Employment and Employment Protection in Developing Countries

45 Pages Posted: 25 Sep 2017

See all articles by Shaimaa Yassin

Shaimaa Yassin

University of Lausanne

François Langot

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP); Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS); IZA Institute of Labor Economics

Abstract

This paper proposes an equilibrium matching model for developing countries' labor markets where the interaction between public, formal private and informal private sectors are taken into account. Theoretical analysis shows that gains from reforms aiming at liberalizing formal labor markets can be annulled by shifts in the public sector employment and wage policies. Since the public sector accounts for a substantial share of employment in developing countries, this approach is crucial to understand the main labor market outcomes of such economies. Wages offered by the public sector increase the outside option value of the workers during the bargaining processes in the formal and informal sectors. It becomes more profitable for workers to search on-the-job, in order to move to these more attractive and more stable types of jobs. The public sector therefore acts as an additional tax for the formal private firms. Using data on workers' flows from Egypt, we show empirically and theoretically that the liberalization of labor markets plays against informal employment by increasing the profitability, and hence job creations, of formal jobs. The latter effect is however dampened or even sometimes nullified by the increase of the offered wages in the public sector observed at the same time.

Keywords: job search, informality, public sector, Egypt, unemployment, wages, policy interventions

JEL Classification: E24, E26, J60, J64, O17

Suggested Citation

Yassin, Shaimaa and Langot, Francois, Informality, Public Employment and Employment Protection in Developing Countries. IZA Discussion Paper No. 11014. Available at SSRN: https://ssrn.com/abstract=3041810

Shaimaa Yassin (Contact Author)

University of Lausanne

Quartier Chambronne
Lausanne, CH-1015
Switzerland

Francois Langot

University of Angers - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP) ( email )

Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France

Université du Maine - Groupe d' Analyse des Itineraires et Niveaux Salariaux (GAINS) ( email )

72085 Le Mans Cedex 9
France

IZA Institute of Labor Economics

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

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