Trade Openness Effects on Informality and the Real Exchange Rate Channel

Abstract

The theoretical frameworks that explain the impact of trade openness on informal employment suggest an ambiguous effect that emphasises the importance of labour market rigidities. This has been verified in a few countries, based solely on microeconometric evidence. This study contributes to the literature by specifying a macroeconometric relationship between trade openness and informal employment that exploits the real exchange rate (RER) channel for a panel of 17 Latin American countries. The channel linking trade openness to informal employment is split into two stages. We identify that the ambiguous relationships across countries is explained by the first stage relationship between trade openness and the RER.

Keywords: Trade-openness, informal employment, unemployment, law enforcement

JEL Classification: J46