Informality and the labor market effects of financial crises

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Embargoed until: 2021-03-21
Author(s)
Colombo, Emilio
Menna, Lorenzo
Tirelli, Patrizio
Griffith University Author(s)
Year published
2019
Metadata
Show full item recordAbstract
We provide evidence, based on a large sample of countries, on the effects of financial crises on key labor market indicators, including official and unofficial employment, unemployment and the participation rate. Crises are followed by a drop in the official market participation rate and by an increase in informal employment. These responses are strongly persistent. Empirical results are then interpreted with a DSGE model which accounts for informality and for financial and labor market frictions. In this framework the informal sector acts as a buffer which absorbs workers in bad times and vice versa. Our simulations suggest ...
View more >We provide evidence, based on a large sample of countries, on the effects of financial crises on key labor market indicators, including official and unofficial employment, unemployment and the participation rate. Crises are followed by a drop in the official market participation rate and by an increase in informal employment. These responses are strongly persistent. Empirical results are then interpreted with a DSGE model which accounts for informality and for financial and labor market frictions. In this framework the informal sector acts as a buffer which absorbs workers in bad times and vice versa. Our simulations suggest the informal sector also is a crisis amplifier for the official economy. For a given financial shock, the ensuing contraction in the official economy is deeper and more persistent the larger the initial size of the unofficial sector. This implies that in less developed economies financial crises cause a relatively stronger reallocation of inputs towards less efficient sectors, expose a larger fraction of the population to the adverse effects of informality, cause a sharper deterioration of public finances limiting governments ability to supply public goods and to engage in countercyclical fiscal policies.
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View more >We provide evidence, based on a large sample of countries, on the effects of financial crises on key labor market indicators, including official and unofficial employment, unemployment and the participation rate. Crises are followed by a drop in the official market participation rate and by an increase in informal employment. These responses are strongly persistent. Empirical results are then interpreted with a DSGE model which accounts for informality and for financial and labor market frictions. In this framework the informal sector acts as a buffer which absorbs workers in bad times and vice versa. Our simulations suggest the informal sector also is a crisis amplifier for the official economy. For a given financial shock, the ensuing contraction in the official economy is deeper and more persistent the larger the initial size of the unofficial sector. This implies that in less developed economies financial crises cause a relatively stronger reallocation of inputs towards less efficient sectors, expose a larger fraction of the population to the adverse effects of informality, cause a sharper deterioration of public finances limiting governments ability to supply public goods and to engage in countercyclical fiscal policies.
View less >
Journal Title
World Development
Volume
119
Copyright Statement
© 2019 The Author(s). Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence, which permits unrestricted, non-commercial use, distribution and reproduction in any medium, providing that the work is properly cited.
Subject
Applied Economics
Economics
Studies in Human Society