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Wages and informality in developing countries

Authors: Costas Meghir , Renata Narita and Jean-Marc Robin
Date: 01 April 2015
Type: Journal Article, American Economic Review, Vol. 105, No. 4, pp. 1509-46

Abstract

We develop an equilibrium wage-posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job. We estimate the model on Brazilian labor force survey data. In equilibrium, firms of equal productivity locate in different sectors, a fact observed in the data. Wages are characterized by compensating differentials. We show that tightening enforcement does not increase unemployment and increases wages, total output, and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market.

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Previous version:
Costas Meghir, Renata Narita and Jean-Marc Robin March 2013, Wages and informality in developing countries, cemmap Working Paper, CWP08/13, cemmap
Costas Meghir, Renata Narita and Jean-Marc Robin August 2011, Wages and informality in developing countries, Mimeos

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