Working Paper
The implications of capital-skill complementarity in economies with large informal sectors
Abstract: In most developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that such barriers are important. This paper describes a model where significant differences arise between formal and informal workers even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.
Keywords: Labor market;
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Bibliographic Information
Provider: Federal Reserve Bank of Dallas
Part of Series: Center for Latin America Working Papers
Publication Date: 2004
Number: 0404