Article

Labor Market Search, Informality and Schooling Investments

Matteo Bobba, Luca Flabbi, and Santiago Levy

Abstract

We develop a search and matching model where matches (jobs) can be formal or informal. Workers choose their level of schooling and search for an employee job either as unemployed or as self-employed. Firms post vacancies in each schooling market, decide the formality status of the job, and bargain with workers over wages. The resulting equilibrium size of the informal sector is an endogenous function of labor market and institutional characteristics. We estimate the model parameters using labor force survey data from Mexico and the exogenous variation induced by the roll-out of a non-contributory social program. Counterfactual experiments based on the estimated model show that eliminating informal jobs increases schooling investments but at the cost of decreasing welfare for both workers and firms.

Keywords

Labor market frictions; Search and matching; Nash bargaining; Informality; Returns to schooling;

JEL codes

  • J24: Human Capital • Skills • Occupational Choice • Labor Productivity
  • J3: Wages, Compensation, and Labor Costs
  • J64: Unemployment: Models, Duration, Incidence, and Job Search
  • O17: Formal and Informal Sectors • Shadow Economy • Institutional Arrangements

Replaces

Matteo Bobba, Luca Flabbi, and Santiago Levy, Labor Market Search, Informality and Schooling Investments, TSE Working Paper, n. 17-867, November 2017, revised June 2021.

Reference

Matteo Bobba, Luca Flabbi, and Santiago Levy, Labor Market Search, Informality and Schooling Investments, International Economic Review, 2022, forthcoming.

Published in

International Economic Review, 2022, forthcoming