Firm Heterogeneity, Informal Wage and Good Governance
28 Pages Posted: 29 Nov 2011
Date Written: November 29, 2011
We provide an analysis of enforcement policies applicable to formal sector in dual labor markets. Using a framework with heterogeneous firms, endogenous determination of informal wage and politically dictated enforcement strategies, we show that firms which operate both in the formal and informal sectors do very little to increase employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcement of labor laws and other regulations should not have aggregate employment effects, particularly when workers are productively homogeneous. For firms operating exclusively in the informal sector, the outcome is different. Taxing the more productive seems to be the optimal strategy.
Keywords: Informal Labor, Wage, Labor Regulations, Enforcement
JEL Classification: J21, J31, J50
Suggested Citation: Suggested Citation