The labor wedge as a matching friction

We use a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role for the labor wedge and unemployment. We find that there is an asymmetric effect of labor market frictions on the labor wedge and unemployment. While the wedge is to a large extent explained by changes in matching efficiency, unemployment is accounted for by the combination of frictions to matching efficiency, job destruction and bargaining. If search and matching frictions give rise to the labor wedge, then it is relevant for explaining unemployment mainly through changes in matching efficiency.     

Job search and mobility in developing countries. Theory and policy implications

A labor market model is developed in which the formal sector is characterized by search frictions whereas the informal sector is competitive. We show that there exists a unique steady-state equilibrium in this dual economy. We then consider different policies financed by a tax on firms' profits. We find that reducing the unemployment benefit or the firms' entry cost in the formal sector induces higher job creation and formal employment, reduces the size of the informal sector but has an ambiguous effect on wages. We also find that an employment/wage subsidy policy and a hiring subsidy policy have different implications. In particular, the former increases the size of the informal sector while the latter decreases it.     

Informal employment in developing countries : Opportunity or last resort?

There is an ongoing debate among researchers and policy makers, whether informal sector employment is a result of competitive market forces or labor market segmentation. More recently it has been argued that none of the two theories sufficiently explains informal employment, but that the informal sector shows a heterogenous structure. For some workers the informal sector is an attractive employment opportunity, whereas for others - rationed out of the formal sector - the informal sector is a strategy of last resort. To test the empirical relevance of this hypothesis we formulate an econometric model which allows for several unobserved segments within the informal sector and apply it to the urban labor market in Côte d'Ivoire.     

Regulation of entry, labor market institutions and the informal sector

This paper develops a two-sector matching model that incorporates the main features of Latin American labor markets. It has an innovation in its matching structure that makes it more consistent with some key stylized facts of the informal sector in these countries. The model is numerically solved using Brazilian data and several policy simulations are performed. Reducing formal sector's entry cost significantly reduces the size of the informal sector and improves overall labor market performance. Increasing enforcement significantly reduces informality but has strong adverse effects on unemployment and welfare. Thus, the results indicate that the tradeoff between lower informal employment and higher unemployment rates is not present when one looks at policies that aim at reducing the costs of being formal, as opposed to policies that simply increase the costs of being informal.     

Informality,public employment and employment protection in developing countries

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.     

LABOR‐MARKET FRICTIONS,HUMAN CAPITAL ACCUMULATION,AND LONG‐RUN GROWTH: POSITIVE ANALYSIS AND POLICY EVALUATION*

We construct a search model with endogenous human capital and labor participation to study the growth effects of short‐run frictions and the effectiveness of human capital policies. Employment, learning effort, and output growth increase with more effective learning, better labor‐market matching, lower job separation, or less costly vacancy creation. Although output growth, employment, vacancy creation, and learning and search effort are most responsive to changes in a human capital policy that directly affects learning effort, such a policy need not be more beneficial for welfare. The effects of human capital policies become larger as the severity of labor‐market frictions rises.     

Unemployment,rural–urban migration and environmental regulation

This paper develops a general equilibrium model that incorporates specific features pertaining to developing countries: a large informal sector and rural–urban migration. A calibrated version of the model is used to study the effects of energy tax changes and a reduction in agricultural‐sector energy subsidies on labor market outcomes. The results indicate that the incidence of energy taxes is partly shifted on to the rural sector through rural–urban migration. The results thus highlight the importance of modeling the features particular to developing countries and the economic general equilibrium effects when assessing the impact of environmental taxation in those countries.     

Labor market institutions and aggregate fluctuations in a search and matching model

This paper explores the influence of labor market institutions on aggregate fluctuations. It uses a dynamic, stochastic, general equilibrium model characterized by search and matching frictions in the labor market and nominal rigidities in the goods market. It finds that firing costs and unemployment benefits can have substantial effects on aggregate fluctuations. Increasing firing costs decreases the volatility of output, employment, and job flows due to the reduction in the mass of jobs sensitive to disturbances and lower incentives for firms to hire and fire workers. Hence, firms adjust to shocks mainly through prices, causing inflation to become more volatile. Raising unemployment benefits has the reverse effect on aggregate fluctuations.     

农民工住房政策与经济增长

中国城市住房市场中存在明显的分割,"城中村"等居住环境恶劣的"非正式"住房容纳了大量农民工。通过构建一个农民工住房与经济增长的理论模型,本文发现,针对农民工的单纯住房数量的供给在低端产业占主导时对经济增长的推动作用明显,但在高技能产业比重逐渐增加时其效果逐渐衰减。相反地,改善农民工居住环境的政策能够使住房供给对经济增长的推动力具有可持续性。同时,这类改良政策能够减少潜在的社会冲突所导致的社会资源非生产性损耗,使得分给城市原有居民的"蛋糕"份额也会变大,因此有希望成为一个可以自发实现的内生政策变迁过程,既有利于促进经济增长,又有利于实现城乡融合和社会和谐。     

Labor market frictions and the international propagation mechanism

The paper studies the role of labor market frictions in accounting for international business cycle comovement. To this aim, we embed labor market search and matching frictions in a two-country New Keynesian model. We show that labor market frictions amplify the international propagation of supply and demand shocks. In terms of cyclical properties then, they raise the cross-country output correlation. Adding labor market search in the New Keynesian model thus improves its ability to account for the business cycle comovement observed in G7 countries in the recent decades. Nominal wage rigidity substantially contributes to this result. Labor market institutions also play a role. Yet, their impact is not unequivocal depending on the institution considered. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.     

Labor Informality: Choice or Sign of Segmentation? A Quantile Regression Approach at the Regional Level for Colombia

The labor market in developing countries is remarkably heterogeneous, with a small productive formal sector characterized by high wages and attractive employment conditions, and a large informal sector characterized by low productivity and volatile wages. The informal sector is particularly diverse. In this paper, we examine the heterogeneity of the informal sector at the regional level in Colombia. In general, our findings suggest that both voluntary and involuntary informal employment co‐exist by choice and as a consequence of labor market segmentation. We also find that there are striking differences in labor market characteristics across cities, particularly with respect to informal employment.     

Macroeconomic policy lessons of labor market frictions

The paper explores the consequences of macroeconomic policy for labor market outcomes in the presence of frictions. It shows how policy may be useful in over-riding frictions, as well as how it might generate adverse outcomes. A partial-equilibrium, empirically grounded model is used to simulate policy effects.The key results are that policy has effects on the stochastic behavior of key variables - measures that reduce unemployment also reduce its persistence and increase the volatility of vacancies. Hiring subsidies and unemployment benefits have substantial effects on labor market outcomes, while employment subsidies or wage tax reductions are not very effective policy instruments.     

Labor market dynamics in urban China and the role of the state sector

This paper studies the effect of state-owned enterprises (SOEs) on the dynamics of the Chinese urban labor market. Using longitudinally matched monthly panel data, we document very low labor force dynamics in the state sector, which leads to a high long-term unemployment rate. We develop and estimate an equilibrium search and matching model with three differences between the state and non-state sectors: labor productivity, labor adjustment cost, and workers’ bargaining power. Counterfactual analysis shows that, among the three channels, reducing the bargaining power of state sector workers is most effective in reducing unemployment duration and unemployment rate.     

Job creation and job destruction in the presence of informal markets

In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects not only on the unemployment rate, but also on the allocation of workers across regulated and unregulated jobs. In this paper, using worker flows data from Brazil, we build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally. We show that our model can explain well the main cyclical patterns that lead to those cyclical reallocations. We also show how the effect of government interventions in the labor market depend on the magnitude of the reallocation of labor across regulated and unregulated sectors. For our calibration, policies that decrease the cost of formal jobs, or increase the cost of informality, raise the share of formal employment while reducing unemployment.     

Under-reporting of Income and Labor Market Performance

To examine the effects on labor market performance of government tax and enforcement policies, this paper develops an equilibrium model featuring tax evasion, matching frictions, and worker–firm wage bargains. In the wage bargains, workers and firms can agree on the amount of remuneration that should not be reported to the tax authorities. We find that increased taxation actually reduces unemployment, whereas more zealous enforcement has the opposite effect.     

Can Countries with Severe Labor Market Frictions Gain from Globalization?

The interaction between increased Southern trade integration (globalization) and labor market frictions is analyzed in a dynamic general-equilibrium North–South nonscale growth model with endogenous Northern innovation and endogenous Southern imitation. The qualitative employment, growth, and relative-wage effects of globalization are shown to depend crucially on the degree of Northern labor market frictions. I demonstrate that only Northern countries with particularly large labor market adjustment costs for both firms and workers benefit from globalization in terms of permanently lower unemployment, temporarily faster growth, and permanently higher wages. This is because of the resulting general-equilibrium feedback effects of Northern labor market frictions that deter Southern imitation incentives. The result does not imply the recommendation to increase Northern labor market rigidities, but it challenges the common belief that labor market flexibility helps Northern countries to better adjust to the "globalization threat" coming from the South.     

What do information frictions do?

Summary. We present an overlapping generations model in which a labor market friction (moral hazard) coexists and interacts with a credit market friction (costly state verification). Our main results are: (i) while credit market frictions have long- and short-run real effects, labor market frictions typically have only short-run effects unless they also affect the volume of investment per worker, (ii) the frictions amplify each other to produce higher long-run unemployment than would result from only labor market frictions, (iii) these distortions may prolong the effect of temporary shocks, and (iv) the dynamics of economies with both frictions are qualitatively similar to their frictionless counterparts.Received: 25 February 2003, Revised: 1 April 2004, JEL Classification Numbers: E13, E24, O41, O17. Correspondence to: Joydeep BhattacharyaWork on this paper began while Bhattacharya was visiting the University of Texas at Austin and was completed when Chakraborty was visiting the IMF Institute in Washington, DC. We are grateful to both institutions for their hospitality. For helpful comments and suggestions we thank Valerie Bencivenga, Dean Corbae, Scott Freeman, Rajesh Singh, participants at the Macro Tea in Austin, and especially, an anonymous referee of this journal. The usual caveat applies.     

A three state model of worker flows in general equilibrium

We develop a simple model featuring search frictions and a nondegenerate labor supply decision along the extensive margin. The model is a standard version of the neoclassical growth model with indivisible labor and idiosyncratic productivity shocks and frictions characterized by employment loss and employment opportunity arrival shocks. We argue that it is able to account for the key features of observed labor market flows for reasonable parameter values. Persistent idiosyncratic productivity shocks play a key role in allowing the model to match the persistence of the employment and out of the labor force states found in individual labor market histories.     

Employment effects of stabilization policies

This paper studies the effects of a stabilization program based on a reduction in the devaluation rate in an optimizing model with capital controls, minimum wages for unskilled labor, an informal sector, and public production of intermediate inputs. Perfect mobility across sectors of the unskilled labor force prevents the emergence of unemployment for that category of labor, but skilled unemployment prevails in equilibrium. The analysis highlights the role of endogenous labor market segmentation in assessing the wage and employment effects of stabilization policies.     

Job-search and foreign capital inflow — A three-sector general equilibrium analysis

The purpose of this paper is to extend the Fields' (1989) multi-sector job-search model in a three-sector general equilibrium framework by introducing international trade and capital as input. The three sectors are the rural sector, the urban informal sector and the urban formal sector. The rural sector and the urban informal sector use one type of mobile capital while the urban formal sector uses a sector-specific capital. We find that the effects of an inflow of foreign capital in the urban formal sector on unemployment and social welfare crucially hinge on the relative factor intensities of the rural sector and the urban informal sector. We show that there is a possibility of trade-off between the government's twin objectives of improvement in social welfare and mitigation of the urban unemployment problem. These results are extremely crucial from the view point of policymaking in an unemployment plagued, low-income developing economy.