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Informality and Long-Run Growth

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Docquier, Frédéric [UCL] Müller, Tobias [université de Genève] Naval, Joaquín [Universitat de Girona]

One of the most salient features of developing economies is the existence of a large informal sector. This paper uses quantitative theory to study the dynamic implications of informality on wage inequality, human capital accumulation, child labor and long-run growth. Our model can generate transitory informality equilibria or informality-induced poverty traps. Its calibration reveals that the case for the poverty-trap hypothesis arises: although informality serves to protect low-skilled workers from extreme poverty in the short-run, it prevents income convergence between developed and developing nations in the long run. Then we examine the effectiveness of different development policies to exit the poverty trap. Our numerical experiments show that using means-tested education subsidies is the most costeffective single policy option. However, for longer time horizons, or as the economy gets closer to the poverty trap threshold, combining means-tested education and wage subsidies is even more effective.

Document type Article de périodique (Journal article) – Article de recherche
Access type Accès restreint
Publication date 2017
Language Anglais
Journal information "The Scandinavian journal of economics" - Vol. 119, no. 4, p. 1040–1085 (October 2017)
Peer reviewed yes
Publisher Basil Blackwell
issn 0347-0520
e-issn 1467-9442
Publication status Publié
Affiliation UCL - SSH/LIDAM/IRES - Institut de recherches économiques et sociales
Keywords Development ; Education ; Child Labor ; Inequality
Links
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See also
[boreal:136848] Informality and long-run growth
Bibliographic reference Docquier, Frédéric ; Müller, Tobias ; Naval, Joaquín. Informality and Long-Run Growth. In: The Scandinavian journal of economics, Vol. 119, no. 4, p. 1040–1085 (October 2017)
Permanent URL http://hdl.handle.net/2078.1/186261