DP5515 Growth and Labour Markets in Developing Countries

Author(s): Mathan Satchi, Jonathan Temple
Publication Date: February 2006
Keyword(s): dual economies, informal sector, matching frictions, urban unemployment
JEL(s): J40, O10
Programme Areas: International Macroeconomics, Institutions and Economic Performance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5515

In middle-income countries, the informal sector often accounts for a substantial fraction of urban employment. We develop a general equilibrium model with matching frictions in the urban labour market, the possibility of self-employment in the informal sector, and scope for rural-urban migration. We investigate the effects of different types of growth on wages and the informal sector, and the extent to which labour market institutions can influence aggregate productivity. We quantify these effects by calibrating the model to data for Mexico, a country with a sizeable informal sector and significant labour market rigidities.