Description: Exchange Rate Appreciations, Labor Market Rigidities, and Informality

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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...

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Main Authors:	Fiess, Norbert M., Fugazza, Marco, Maloney, William
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	BARRIERS TO ENTRY BUDGET CONSTRAINT CAPITAL INTENSIVE CAPITAL MARKETS CONCEPTUAL FRAMEWORK CONSUMERS CONSUMPTION GROWTH CONSUMPTION LEVELS DOWNWARD PRESSURES ELASTICITIES ELASTICITY ELASTICITY OF SUBSTITUTION EMPIRICAL ANALYSIS EMPIRICAL EVIDENCE EMPLOYMENT EQUILIBRIUM EXCHANGE RATE EXCHANGE RATE DEPRECIATION FOREIGN ASSETS FORMAL SECTOR GOVERNMENT REGULATION GROWTH RATE INDEXATION INFLATION INFORMAL SECTOR INTEREST RATE LABOR FORCE LABOR MARKET LABOR MARKETS MARGINAL COSTS MARGINAL PRODUCT MARGINAL PRODUCTIVITY MIGRATION MINIMUM WAGES NOMINAL EXCHANGE RATE PRODUCTION PRODUCTION FUNCTIONS PRODUCTION INCREASES PRODUCTIVITY PRODUCTIVITY GROWTH REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATE RELATIVE PRICE STABILIZATION POLICIES SUBSTITUTION EFFECT TIME SERIES TRADABLE GOODS UTILITY FUNCTION WAGE RIGIDITIES WAGES
Online Access:	http://documents.worldbank.org/curated/en/2002/02/2874378/exchange-rate-appreciations-labor-market-rigidities-informality http://hdl.handle.net/10986/19335

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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