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

109 Pages Posted: 25 Jan 2021

See all articles by Rafael Dix-Carneiro

Rafael Dix-Carneiro

Duke University

Pinelopi Goldberg

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation; Peterson Institute for International Economics; Bureau for Research and Economic Analysis of Development (BREAD); Centre for Economic Policy Research (CEPR)

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 of Oxford - Department of Economics

Multiple version iconThere are 4 versions of this paper

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 that: (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," but not a "welfare buffer" in the event of negative economic shocks.

JEL Classification: F14, F16, J46, O17

Suggested Citation

Dix-Carneiro, Rafael and Goldberg, Pinelopi (Penny) and Meghir, Costas and Ulyssea, Gabriel, Trade and Informality in the Presence of Labor Market Frictions and Regulations. IZA Discussion Paper No. 14060, Available at SSRN: https://ssrn.com/abstract=3771743 or http://dx.doi.org/10.2139/ssrn.3771743

Rafael Dix-Carneiro (Contact Author)

Duke University ( email )

100 Fuqua Drive
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Pinelopi (Penny) Goldberg

Yale University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Peterson Institute for International Economics ( email )

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Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
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United States

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

Costas Meghir

Yale University ( email )

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New Haven, CT CT 06511
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Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

Institute for Fiscal Studies (IFS) ( 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 of Oxford - Department of Economics ( email )

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United Kingdom

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