Exchange Rate Appreciations, Labor Market Rigidities, and Informality
This paper works at the interface of the literature exploring the raison d'etre of the informal labor market and that explaining the real exchange rate appreciations occurring in many Latin American countries during periods of reform. The auth...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/02/2874378/exchange-rate-appreciations-labor-market-rigidities-informality http://hdl.handle.net/10986/19335 |
| Summary: | This paper works at the interface of the
literature exploring the raison d'etre of the informal
labor market and that explaining the real exchange rate
appreciations occurring in many Latin American countries
during periods of reform. The authors first build a small
country-Australian style model where the informal sector is
seen as an unregulated non-tradables sector, augmented by
heterogeneity in entrepreneurial ability and capital
adjustment costs. They then examine the behavior of the
model with and without a formal sector rigidity. It shows
that the co-movements of relative formal/informal incomes,
formal/informal sector size, and the real exchange rate can
offer insight into the level of distortion in the labor
market and the source of exchange rate fluctuations. The
paper then explores time series data from Brazil, Colombia
and Mexico using multivariate co-integration techniques to
establish what "regime" each country is in at
various periods of time. Mexico appears to be relatively
undistorted and the 1987-92 appreciation appears to be
largely a function of a boom in the non-tradables sector
rather than wage inertia. In spite of a secular expansion of
the informal sector there is little evidence of dualism or
of a rigidity driven appreciation of the Real, from
1993-1996. Post 1995 Colombia corresponds to a classic
segmented labor market and an appreciation partly driven by
labor market rigidities. Graphical analysis suggests that
neither the Argentine appreciation (1988-1992) or the
celebrated Chilean appreciation (1975-1982) were driven by
inertial forces |
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