Abstract:In developing countries, informality is mainly concentrated on younger and older workers. In this paper, we propose a dual labor market theory that highlights how frictions and taxation in the formal sector as well as educational choices interact to shape the informality rate over the life-cycle. We develop a lifecycle model with search frictions, skill heterogeneities, and endogenous educational choices. We carry out a numerical analysis and show that our model reproduces remarkably well the life-cycle patter… Show more
How do labor market and health outcomes interact over the life cycle in a country characterized by a large informal sector and strong inequalities? To quantify the effects of bad health on labor market trajectories, wealth, and consumption, we develop a life-cycle heterogeneous agents model with a formal and an informal sector. We estimate our model using data from the National Income Dynamics Study, the first nationally representative panel study in South Africa. We run counterfactual experiments and show that health shocks have an important impact on wealth and consumption. The channel through which these shocks propagate strongly depends on the job status of individuals at the time of the shock. For formal workers, bad health reduces labor efficiency, which translates into lower earnings. For informal workers and the non-employed, the shock lowers the job finding rate and in-creases job separation into nonemployment, which results in a surge in non-employment spells. As bad health spells persist more for nonemployed than for employed individuals, the interaction between labor market risks and health risks generates a vicious circle.
The concept and influence of untraded inter‐dependencies are under‐explored in the industrial cluster and informal economy literature. In this paper, we attempt to bridge this gap by extending the conventional Cobb‐Douglas production function to operationalising and testing the moderating effects of two forms of untraded inter‐dependencies in informal production. Based on the diffusion theory, we argue that knowledge‐sharing would favour informal production, as opposed to tool‐sharing. Using quantitative methods, 334 informal artisans were randomly sampled from three clusters in the Kumasi Metropolis of Ghana and analysed data obtained with moderating models and simple slopes plots. The tested models and fuzzy set configurations confirmed that knowledge‐sharing, but not tool‐sharing, has significant interaction effects on informal production. The optimal model derived would be one in which capital interacts with incremental knowledge‐sharing at the existing level of tool‐sharing among the artisans. This paper serves as an extension of new economic geography with an additional factor of untraded inter‐dependencies. As part of post‐COVID restoration and enhancement of informal production processes, we recommend city officials to deliberately plan and space clustered enterprises that enable the observed rates of interactions between production factors and untraded inter‐dependencies.
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