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  • 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)
    Tirelli, Patrizio
    Year published
    2019
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    Abstract
    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 ...
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    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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    Journal Title
    World Development
    Volume
    119
    DOI
    https://doi.org/10.1016/j.worlddev.2019.03.001
    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
    Publication URI
    http://hdl.handle.net/10072/386450
    Collection
    • Journal articles

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