Trade and Informality in the Presence of Labor Market Frictions and Regulations

108 Pages Posted: 9 Apr 2021

See all articles by Rafael Dix-Carneiro

Rafael Dix-Carneiro

Duke University

Pinelopi Koujianou Goldberg

Princeton University; National Bureau of Economic Research (NBER)

Costas Meghir

Yale University; Yale University - Cowles Foundation; Institute for Fiscal Studies (IFS); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Gabriel Ulyssea

University College London

Multiple version iconThere are 3 versions of this paper

Date Written: April 7, 2021

Abstract

We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show the following: 1) Trade openness unambiguously decreases informality in the tradable sector but has ambiguous effects on aggregate informality. 2) The productivity gains from trade are understated when the informal sector is omitted. 3) Trade openness results in large welfare gains even when informality is repressed. 4) Repressing informality increases productivity but at the expense of employment and welfare. 5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. 6) The informal sector works as an “unemployment buffer” but not a “welfare buffer” in the event of negative economic shocks.

Keywords: Labor market effects of trade, Informality, Unemployment

JEL Classification: F14, F16, J46, O17

Suggested Citation

Dix-Carneiro, Rafael and Goldberg, Pinelopi Koujianou and Meghir, Costas and Ulyssea, Gabriel, Trade and Informality in the Presence of Labor Market Frictions and Regulations (April 7, 2021). Available at SSRN: https://ssrn.com/abstract=3822403 or http://dx.doi.org/10.2139/ssrn.3822403

Rafael Dix-Carneiro (Contact Author)

Duke University ( email )

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Pinelopi Koujianou Goldberg

Princeton University ( email )

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National Bureau of Economic Research (NBER)

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Costas Meghir

Yale University ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Gabriel Ulyssea

University College London ( email )

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