Article ID Journal Published Year Pages File Type
967273 Journal of Monetary Economics 2006 13 Pages PDF
Abstract
In developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there is little empirical evidence that such barriers are important. This paper describes a model where, in equilibrium, the characteristics of formal and informal workers differ systematically, even though labor markets are perfectly competitive. The informal sector emphasizes low-skill work, as in the data, because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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