Informal Labour and Credit Markets: A Survey.



hoc assumption about some features characterizing the formal rather than the informal
sector.
21

Yet another initial way to model informality involves cost-benefit analysis. Within this
approach, the informal sector is seen as an unregulated, largely voluntary, sector (Lucas
(1978) and Rauch (1991)), where agents ponder the costs of becoming formal against the
benefits of being informal.

In section 4 we will review recent advances in modelling informality in the presence of
labour frictions, namely the search-matching theoretical framework and its multi-sectoral
extensions. Relative to the models of the Harris-Todaro tradition, the richer labour market
structure of the search-matching framework determines the wage in the formal sector
endogenously, and allows for a wider range of effects to be analyzed. Relative to the
voluntary view of informality, the search-matching approach microfounds the decision of
firms and workers to enter the formal/informal sector, while distinguishing among the
three margins of informality by focusing on the flows between formal and informal labour
market, and unemployment.

4 Informality and labour market frictions

Building on the earlier literature, a variety of more sophisticated models have been devel-
oped to portray formal, informal and integrated labour markets. In these models, trading
frictions in the formal and/or informal sectors are important and it is possible to deter-
mine rules governing the flows between the two sectors, as well to and from the pool of
unemployed.

For most of these second generation models, the workhorse model involves incorpo-
rating the search matching model of Mortensen-Pissarides in Harris and Todaro (1970)’s
model. In this case the question of how informal-formal jobs are created is not very differ-
ent from the distinction between the creation/destruction of rural and urban jobs and the
approach is in line with the standard equilibrium model of the labour market with market
frictions and occupational/participation choice (e.g. McKenna (1987) and Garibaldi and
Wasmer (2001)).

21The “old search” literature with migration (Fields (1975)) can also be considered an early attempt to
explain and model the existence of an informal sector.

15



More intriguing information

1. The Impact of EU Accession in Romania: An Analysis of Regional Development Policy Effects by a Multiregional I-O Model
2. The name is absent
3. Linkages between research, scholarship and teaching in universities in China
4. Tourism in Rural Areas and Regional Development Planning
5. SOME ISSUES IN LAND TENURE, OWNERSHIP AND CONTROL IN DISPERSED VS. CONCENTRATED AGRICULTURE
6. Opciones de política económica en el Perú 2011-2015
7. Effort and Performance in Public-Policy Contests
8. The name is absent
9. CREDIT SCORING, LOAN PRICING, AND FARM BUSINESS PERFORMANCE
10. THE UNCERTAIN FUTURE OF THE MEXICAN MARKET FOR U.S. COTTON: IMPACT OF THE ELIMINATION OF TEXTILE AND CLOTHING QUOTAS
11. Non Linear Contracting and Endogenous Buyer Power between Manufacturers and Retailers: Empirical Evidence on Food Retailing in France
12. On the Existence of the Moments of the Asymptotic Trace Statistic
13. The effect of classroom diversity on tolerance and participation in England, Sweden and Germany
14. Transport system as an element of sustainable economic growth in the tourist region
15. Needing to be ‘in the know’: strategies of subordination used by 10-11 year old school boys
16. The name is absent
17. Synthesis and biological activity of α-galactosyl ceramide KRN7000 and galactosyl (α1→2) galactosyl ceramide
18. Passing the burden: corporate tax incidence in open economies
19. The name is absent
20. The Role of area-yield crop insurance program face to the Mid-term Review of Common Agricultural Policy