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Labor Market Search, Informality and Schooling Investments

Author

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  • Bobba, Matteo
  • Flabbi, Luca
  • Levy Algazi, Santiago
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.

Suggested Citation

  • Bobba, Matteo & Flabbi, Luca & Levy Algazi, Santiago, 2018. "Labor Market Search, Informality and Schooling Investments," IDB Publications (Working Papers) 8752, Inter-American Development Bank.
  • Handle: RePEc:idb:brikps:8752
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    Cited by:

    1. Bobba, Matteo & Flabbi, Luca & Levy, Santiago & Tejada, Mauricio, 2021. "Labor market search, informality, and on-the-job human capital accumulation," Journal of Econometrics, Elsevier, vol. 223(2), pages 433-453.
    2. Benjamín Villena-Roldán, 2024. "Unpacking the Persistence of Informality," Journal of Labor Research, Springer, vol. 45(2), pages 203-231, June.
    3. Matteo Bobba & Luca Flabbi & Santiago Levy, 2022. "Labor Market Search, Informality, And Schooling Investments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 211-259, February.
    4. Conti, Gabriella & Ginja, Rita & Narita, Renata, 2018. "The Value of Health Insurance: A Household Job Search Approach," IZA Discussion Papers 11706, Institute of Labor Economics (IZA).
    5. Girsberger, Esther Mirjam & Meango, Romuald, 2022. "The Puzzle of Educated Unemployment in West Africa," IZA Discussion Papers 15721, Institute of Labor Economics (IZA).
    6. Camilo Bohorquez-Penuela & Andrea Otero-Cortes, 2020. "Blame it on the Rain: The Effects of Weather Shocks on Formal Rural Employment in Colombia," Documentos de Trabajo Sobre Economía Regional y Urbana 18404, Banco de la República, Economía Regional.
    7. Renata Narita, 2020. "Self-Employment in Developing Countries: A Search-Equilibrium Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 1-34, January.
    8. Renata Narita, 2020. "Self-Employment in Developing Countries: A Search-Equilibrium Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 1-34, January.
    9. Andrea Otero-Cortés, 2022. "Heterogeneous Returns of Informality: Evidence From Brazil," Documentos de Trabajo Sobre Economía Regional y Urbana 20176, Banco de la República, Economía Regional.
    10. Esteban-Pretel, Julen & Kitao, Sagiri, 2021. "Labor Market Policies in a Dual Economy," Labour Economics, Elsevier, vol. 68(C).
    11. Kerndler, Martin, 2023. "Occupational safety in a frictional labor market," Labour Economics, Elsevier, vol. 83(C).
    12. Mauricio Tejada & Claudia Piras & Luca Flabbi & Monserrat Bustelo, 2021. "Gender Gaps in Latin American Labor Markets: Implications from an Estimated Search Model," Annals of Economics and Statistics, GENES, issue 142, pages 111-178.
    13. Kevin Donovan & Will Jianyu Lu & Todd Schoellman, 2023. "Labor Market Dynamics and Development," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(4), pages 2287-2325.
    14. Bustelo, Monserrat & Flabbi, Luca & Piras, Claudia & Tejada, Mauricio, 2019. "Female Labor Force Participation, Labor Market Dynamic and Growth in LAC," IDB Publications (Working Papers) 9420, Inter-American Development Bank.
    15. Busso, Matias & Chauvin, Juan Pablo & Herrera L., Nicolás, 2021. "Rural-urban migration at high urbanization levels," Regional Science and Urban Economics, Elsevier, vol. 91(C).
    16. Fang, Lan & Quan, Yurong & Mao, Hui & Chen, Shaojian, 2022. "The Information Communication Technology and Off-farm Employment of Rural Laborers: An Analysis Based on the Micro Data of China Family Panel Studies," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322088, Agricultural and Applied Economics Association.
    17. Brenda Samaniego de la Parra & Andrea Otero-Cortés & Leonardo Fabio Morales, 2021. "The Labor Market Effects of Part-Time Contributions to Social Security: Evidence from Colombia," Documentos de trabajo sobre Economía Regional y Urbana 302, Banco de la Republica de Colombia.
    18. Flabbi, Luca & Tejada, Mauricio M., 2023. "Are informal self-employment and informal employment as employee behaviorally distinct labor force states?," Economics Letters, Elsevier, vol. 231(C).
    19. Azuara Herrera, Oliver & Azuero, Rodrigo & Bosch, Mariano & Torres, Jesica, 2019. "Special Tax Regimes in Latin America and the Caribbean: Compliance, Social Protection, and Resource Misallocation," IDB Publications (Working Papers) 9511, Inter-American Development Bank.
    20. Lucas Navarro & Mauricio Tejada, 2022. "Does Public Sector Employment Buffer the Minimum Wage Effects?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 168-196, January.
    21. Finamor, Lucas, 2024. "Labor Market Informality, Risk, and Insurance," MPRA Paper 121662, University Library of Munich, Germany.

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    14. Bergolo, M. & Cruces, G., 2021. "The anatomy of behavioral responses to social assistance when informal employment is high," Journal of Public Economics, Elsevier, vol. 193(C).
    15. Gabriel Ulyssea, 2018. "Firms, Informality, and Development: Theory and Evidence from Brazil," American Economic Review, American Economic Association, vol. 108(8), pages 2015-2047, August.
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    More about this item

    Keywords

    Labor market frictions; Search and matching; Nash bargaining; Informality; Returns to schooling;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    Statistics

    Access and download statistics

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