Cover IMF Working Papers
Buy Book in Print
Labor Market Informality and the Business Cycle
Author:
Frederic Lambert
Search for other papers by Frederic Lambert in
Current site
Google Scholar Close
,
Mr. Andrea Pescatori
Search for other papers by Mr. Andrea Pescatori in
Current site
Google Scholar Close
, and
Mr. Frederik G Toscani
Search for other papers by Mr. Frederik G Toscani in
Current site
Google Scholar Close
Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 256
Language:
English
Publication Date:
20 Nov 2020
DOI:
https://doi.org/10.5089/9781513561288.001
ISBN:
9781513561288
ISSN:
1018-5941
Pages:
42
Keywords:
labor market; informality; business cycle; WP; commodity price shock; frictions affect labor market dynamics; GDP growth; sector TFP; labor market informality; TFP parameter; business cycle model; TFP shock; labor market frictions affect labor market dynamics; Total factor productivity; Labor markets; Business cycles; Unemployment
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.9 MB) Download Epub
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.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund