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  3. American Economic Review
  4. April 2015
  5. Wages and Informality in Developing Countries

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Wages and Informality in Developing Countries

  • Costas Meghir
  • Renata Narita
  • Jean-Marc Robin
American Economic Review
vol. 105, no. 4, April 2015
(pp. 1509–46)
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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. (JEL E26, J24, J31, J46, O15, O17)

Citation

Meghir, Costas, Renata Narita, and Jean-Marc Robin. 2015. "Wages and Informality in Developing Countries." American Economic Review 105 (4): 1509–46. DOI: 10.1257/aer.20121110

Additional Materials

JEL Classification

  • E26 Informal Economy; Underground Economy
  • J24 Human Capital; Skills; Occupational Choice; Labor Productivity
  • J31 Wage Level and Structure; Wage Differentials
  • J46 Informal Labor Markets
  • O15 Economic Development: Human Resources; Human Development; Income Distribution; Migration
  • O17 Formal and Informal Sectors; Shadow Economy; Institutional Arrangements