COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1874 Wages and Informality in Developing Countries Costas Meghir, Renata Narita and Jean-Marc Robin September 2012 It is often argued that informal labor markets in developing countries
promote growth by reducing the impact of regulation. On the other hand informality may
reduce the amount of social protection offered to workers. We extend the wage-posting
framework of Burdett and Mortensen (1998) to allow heterogeneous firms to decide whether
to locate in the formal or the informal sector, as well as set wages. Workers engage in
both off the job and on the job search. We estimate the model using Brazilian micro data
and evaluate the labor market and welfare effects of policies towards informality. |
