Date of Award
Spring 2024
Document Type
Dissertation
Degree Name
Doctor of Philosophy (PhD)
Department
Economics
First Advisor
Meghir, Costas
Abstract
Informal employment does not comply with labor regulations, leaving workers unprotected against unemployment or health risks. Despite this, informal employment is prevalent, accounting for over 30% of the labor force in many developing countries. To address this issue, governments have implemented labor market policies aimed at (i) promoting formal job creation and (ii) preventing formal job destruction. Among the first group of policies, countries have introduced fixed-term or temporary contracts, a flexible device for firms to adjust labor. Among the second group, governments have imposed employment protection policies such as severance pay upon firing. These policies have led to the emergence of informal and dual labor markets globally, where informal jobs coexist with two types of formal contracts: temporary and permanent (open-ended). Compared to informal jobs, these formal contracts offer amenities and unemployment insurance to workers. In addition to this, only permanent jobs de facto provide employment protection through severance pay upon firing. This coexistence of different types of jobs with varying levels of job security generates tension between workers and firms. While workers may value permanent contracts the most due to their enhanced protection, firms may find them the most costly, prompting them to steer employment towards less valuable temporary and informal jobs. This dissertation investigates how employment protection and credit supply shocks affect job-to-job transitions, formal employment, its composition, and firms' performance. It consists of three self-contained essays studying the effects of the severance pay and the Peruvian government-guaranteed loan program launched during the COVID-19 pandemic. I use the novel Peruvian Employer-Employee and Lender-Borrower datasets to address these objectives. The first chapter sheds light on the intricate relationship between employment protection and labor market dynamics. I examine the decisions made by firms and workers regarding the supply and demand of informal, temporary, and permanent positions and the dynamics of worker transitions between these categories. I also study the consequences of employment protection, analyzing how severance pay for permanent contracts affects worker transitions. To explore these issues, I develop an equilibrium model with directed search, where firms and workers jointly determine the types of contracts available in the market. The model is estimated using the novel Peruvian Employer-Employee dataset. In equilibrium, workers climb a job ladder, where informal jobs constitute the initial step into the labor market, and temporary contracts serve as a stepping stone to permanent positions, which workers value the most. In the short run, reducing the severance pay from 6.0 to 1.2 monthly wages promotes total formal employment. Moreover, it generates a substitution of temporary jobs for permanent ones, improving the internal composition of formal labor. However, these gains decrease by more than 50% in the long run when firms pay higher wages to permanent employees to compensate them for losing job security. These results imply that reducing severance pay is an effective but limited policy to foster more valuable formal employment and permanent hiring in the long term. Through the lens of the equilibrium model described in the first chapter, a promising alternative to enhance formal employment is to boost firms' productivity. Given that firms' productivity is usually constrained by the lack of access to credit, in the second chapter, my coauthor and I assess the REACTIVA program, launched to enhance firms' private funding of working capital, necessary to meet their commitments with their employees and providers during the COVID-19 pandemic. Using the novel matched Lender-Borrower dataset of the Peruvian Financial System, we determine the impact of REACTIVA on credit and real outcomes of eligible firms. We find that REACTIVA allowed eligible firms to substitute more expensive unguaranteed credit for cheaper sponsored loans provided under the program. Finally, we find a positive causal effect on formal labor demand, allowing eligible firms to ascend in the size distribution within their four-digit industry groups. This evidence implies that REACTIVA successfully allowed firms to access cheaper credit and to carry out more positive employment adjustments than non-eligible firms. In the final chapter, I examine job-to-job transitions within formal employment in Peru, identifying three key characteristics. First, most transitions decrease in the current wage and rung in the job ladder, suggesting a gradual transition from lower-paying to higher-paying positions. Second, they result in positive but diminishing wage gains as workers advance in their formal sector careers. Finally, transitions are associated with limited wage mobility. This evidence indicates a gradual progression of workers towards higher-paying or more formal jobs. Therefore, implementing policies to facilitate these transitions is essential for promoting long-term formal employment in Peru.
Recommended Citation
Casavilca Silva, Pedro Miguel, "Essays on Firms and Workers in an Informal Economy" (2024). Yale Graduate School of Arts and Sciences Dissertations. 1444.
https://elischolar.library.yale.edu/gsas_dissertations/1444
