It is often argued that informal labor markets in developing countries promote growth by reducing the impact of regulation. On the other hand informality may reduce the amount of social protection oﬀered to workers. We extend the wage-posting framework of Burdett and Mortensen (1998) to allow heterogeneous ﬁrms to decide whether to locate in the formal or the informal sector, as well as set wages. Workers engage in both oﬀ the job and on the job search. We estimate the model using Brazilian micro data and evaluate the labor market and welfare eﬀects of policies towards informality.
Meghir, Costas; Narita, Renata; and Robin, Jean-Marc, "Wages and Informality in Developing Countries" (2012). Cowles Foundation Discussion Papers. 2238.