Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/232812 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14060
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show that: (1) Trade openness unambiguously decreases informality in the tradable sector, but has ambiguous effects on aggregate informality. (2) The productivity gains from trade are understated when the informal sector is omitted. (3) Trade openness results in large welfare gains even when informality is repressed. (4) Repressing informality increases productivity, but at the expense of employment and welfare. (5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. (6) The informal sector works as an "unemployment," but not a "welfare buffer" in the event of negative economic shocks.
Subjects: 
regulations
trade
informality
labor market frictions
JEL: 
F14
F16
J46
O17
Document Type: 
Working Paper

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