Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/173908
Authors: 
Bobba, Matteo
Flabbi, Luca
Levy, Santiago
Year of Publication: 
2018
Series/Report no.: 
IDB Working Paper Series IDB-WP-863
Abstract: 
This paper develops a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether to search for a job as unemployed or as self-employed. Firms optimally decide the formality status of the job and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market parameters and institutions. The paper focuses on an increasingly important institution: a 'dual' social protection system whereby contributory benefits in the formal sector coexist with non-contributory benefits in the informal sector. Preferences are estimated for the system-together with all the other structural parameters of the labor market-using labor force survey data from Mexico and the time-staggered entry across municipalities of a non-contributory social program. Policy experiments show that informality may be reduced by either increasing or decreasing the payroll tax rate in the formal sector. They also show that a universal social security benefit system would decrease informality, incentivize schooling, and increase productivity at a relative fiscal cost similar to that generated by the current system.
Subjects: 
Labor market frictions
Search and matching
Nash bargaining
Informality
Returns to schooling
JEL: 
J24
J3
J64
O17
Persistent Identifier of the first edition: 
Creative Commons License: 
http://creativecommons.org/licenses/by-nc-nd/3.0/igo/legalcode
Document Type: 
Working Paper
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