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The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors, Center for Latin American Economics Working Paper 0404

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The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors, Center for Latin American Economics Working Paper 0404

DATE: December 2004

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ABSTRACT: In most developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that such barriers are important. This paper describes a model where significant differences arise between formal and informal workers even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.

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Federal Reserve Bank of Dallas. "The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors, Center for Latin American Economics Working Paper 0404" in Working Papers (Federal Reserve Bank of Dallas) (December 2004). https://fraser.stlouisfed.org/title/7140/item/646664, accessed on May 2, 2024.

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