Labor Market Informality and the Business Cycle

Labor market informality is a pervasive feature of most developing economies. Motivated by the empirical regularity that the labor informality rate falls with GDP per capita, both at business cycle frequency and in a cross-section of countries, and that the Okun's coefficient falls with the lev...

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Bibliographic Details
Main Author: Lambert, Frederic
Other Authors: Pescatori, Andrea, Toscani, Frederik
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 2020
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
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100 1 |a Lambert, Frederic 
245 0 0 |a Labor Market Informality and the Business Cycle  |c Frederic Lambert, Andrea Pescatori, Frederik Toscani 
260 |a Washington, D.C.  |b International Monetary Fund  |c 2020 
300 |a 42 pages 
651 4 |a Colombia 
653 |a Business cycles 
653 |a Labour; income economics 
653 |a Unemployment: Models, Duration, Incidence, and Job Search 
653 |a Capital and Total Factor Productivity 
653 |a Cost 
653 |a Industrial productivity 
653 |a Production 
653 |a Unemployment 
653 |a Labor markets 
653 |a Demand and Supply of Labor: General 
653 |a Total factor productivity 
653 |a Labor 
653 |a Informal Economy 
653 |a Cycles 
653 |a Labor Economics: General 
653 |a Economic growth 
653 |a Labor market 
653 |a Macroeconomics 
653 |a Underground Econom 
653 |a Business Fluctuations 
653 |a Capacity 
653 |a Business and Economics 
653 |a Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) 
653 |a Production and Operations Management 
653 |a Labor economics 
700 1 |a Pescatori, Andrea 
700 1 |a Toscani, Frederik 
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520 |a Labor market informality is a pervasive feature of most developing economies. Motivated by the empirical regularity that the labor informality rate falls with GDP per capita, both at business cycle frequency and in a cross-section of countries, and that the Okun's coefficient falls with the level of labor informality, we build a small open-economy dynamic stochastic general equilibrium model with two sectors, formal and informal, which can replicate these key stylized facts. The model is calibrated to Colombia. The results show that labor market and tax reforms play an important role in changing the informality rate but also caution against over-optimism - with low GDP per capita, informality will always be relatively high as there is insufficient demand for formal goods. Quantitatively we find that higher productivity in the formal sector is key in explaining the difference between Colombia and countries with significantly lower informality. We use the model to study how labor informality and labor market frictions mediate the cyclical response of the economy to shocks, including commodity price shocks which are particularly relevant in Latin America. Informality is shown to play an important role as a shock absorber with the informal-formal margin limiting movements in the employed-unemployed margin