Gross Worker Flows in the Presence of Informal Labor Markets. The Mexican Experience 1987-2002
Paper No' CEPDP0753:
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Keywords: Gross worker flows; Labor market dynamics, Informality, Developing Countries
JEL Classification: J41;J42; J6
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This Paper is published under the following series:
CEP Discussion Papers
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This paper applies recent advances in the study of labor market dynamics to a representative
developing country with a large unregulated of “informal” sector, Mexico. It finds, first, that the
formal salaried sector shows the same procyclical job finding rate and mildly countercyclical
separation behavior identified in the recent US literature by Shimer (2005a) and Hall (2005). The
unregulated informal sector, however, shows reasonable acyclicality in the job finding rate
coupled with sharp countercyclical movements in the job separation rate, consistent with
standard small firm dynamics and Davis and Haltiwanger (1992 and 1999). The differential
behavior of regulated and unregulated sectors, and the finding of relative wage rigidity in the
former, sheds suggestive light on the roots of countercyclical job finding behavior in the US.
Second, the patterns of worker transitions between all sectors, formal and informal correspond to
the job-to-job dynamics observed in the US and not to the traditional idea of informality
constituting the inferior sector of a segmented market. That said, the counter cyclical job finding
in the formal sector combined with the acyclical job finding in informality does lead to the latter
absorbing relatively more labor during downturns, even as its increased separation rates drive
movements in unemployment.