Leadership

Cyclical Informality And Unemployment

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Executive Summary

The proportion of informal or unprotected workers in developing countries is large. In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects on the unemployment rate, and also produce large reallocations of workers between "Regulated" and "Unregulated" jobs. In this paper, the authors report the main cyclical patterns of one such labor market: Brazil. They then use the empirical regularities found in the data to build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally.

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