Labor Market Search, Informality and Schooling Investments

67 Pages Posted: 26 Dec 2018

See all articles by Matteo Bobba

Matteo Bobba

Inter-American Development Bank (IDB) - Research Department

Luca Flabbi

RES - Inter-American Development Bank; Georgetown University - Department of Economics; IZA Institute of Labor Economics

Santiago Levy

Inter-American Development Bank (IDB)

Date Written: January 2018

Abstract

This paper develops a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether to search for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. The paper focuses on an increasingly important institution: a "dual" social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. Preferences are estimated for the system--together with all the other structural parameters of the labor market--using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost similar to that generated by the current system.

Keywords: Labor market frictions, Search and matching, Nash bargaining, Informality

JEL Classification: J24, J3, J64, O17

Suggested Citation

Bobba, Matteo and Flabbi, Luca and Levy, Santiago, Labor Market Search, Informality and Schooling Investments (January 2018). IDB Working Paper No. IDB-WP-863. Available at SSRN: https://ssrn.com/abstract=3305507 or http://dx.doi.org/10.2139/ssrn.3305507

Matteo Bobba (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Luca Flabbi

RES - Inter-American Development Bank ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

HOME PAGE: http://www9.georgetown.edu/faculty/lf74/

IZA Institute of Labor Economics

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

Santiago Levy

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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