Informal Labour and Credit Markets: A Survey.

are more likely to pay a higher wage. The duality between formal and informal sector is
explained by firm size without the need of introducing any sort of heterogeneity among
workers.

4.2 The intersectoral margin for workers

A sorting similar to Boeri and Garibaldi (2005) is described in Albrecht et al. (2008). The
paper analyzes worker’s decision to enter the formal or the informal sector using a search-
matching model with endogenous job destruction. Workers have the same productivity in
the informal sector (self-employment) while they have different productivity if they decide
to enter the formal sector. In this way the relative productivity in the two sectors is an
important factors in the workers’ choice. Workers with high productivity levels accept only
formal job offers. There are only formal sector firms and they do not know in advance
what type of worker they will meet. In this framework, workers trade-off their abilities in
the formal sector with a higher job creation in the informal sector.

Also Zenou (2008) assumes that homogeneous workers in the formal sector are more
productive than workers working informally. This difference in productivity is justified
in terms of better technology, access to infrastructure etc. The paper shows that the
informality is a result of market frictions in the formal sector.²² As Albrecht et al. (2008),
Zenou (2008) distinguishes between three labour markets: the formal sector, the informal
sector and ‘formal’ unemployment. In Zenou’s the informal sector is competitive and the
marginal worker trade-off the higher productivity of the formal sector with the friction-less
competitive market where all workers find a job. This framework largely simplifies the
analysis and allows for analytical solution and interesting policy analysis. It also implies
that worker’s decision to work formally or informally is based on an endogenous outside
option.²³

Are there more coordination failures in the formal firms than in the informal one or
does the informal sector need special connections which are more time consuming? Zenou
assumes at the limit that there are no frictions at all in the informal sector and this
is justified by the fact that informal workers are mainly self-employed or they work for
²²The author notes that without market frictions all workers would enter and find work in the formal
sector.

²³The marginal productivity of informal labour decreases when the labour supply in that sector increases.

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