Research

Work in Progress

• (In)formal Growth: Wage Dynamics in Developing Economies (with Santiago Franco)
  Labor informality is pervasive in developing economies. In this paper, we investigate the interconnection between informal labor, human capital accumulation, and economic growth. How do informal labor markets affect human capital accumulation, and vice versa? What are the aggregate effects of this interaction on growth and welfare? Using panel data from Chile and Colombia, we explore the dynamics of the formal and informal sectors by documenting two new empirical facts. First, wages for formal workers increase significantly more over the life cycle than wages for informal workers. Second, a substantial portion of this formal wage premium is attributable to workers’ skill-based sorting. To rationalize these patterns, we build an endogenous growth model where heterogeneous workers sort into formal and informal labor markets based on their potential earnings. Worker’s human capital increases over their life cycle through interactions with other workers. In equilibrium, more knowledgeable workers sort into the formal sector, and the growth rate of the economy is determined by the rate at which all workers meet more knowledgeable formal workers. We structurally estimate the parameters of the model and use it to quantify the effect of formalization policies. We find that policies that decrease the cost of operating formally are more effective in reducing the size of the informal sector compared to policies that increase the cost of producing informally. However, both types of policies have adverse effects on economic growth by lowering the quality of interactions of more skilled workers.
• Good Firms, Bad Policies: The Dynamics of Informality and Industry Policy in Shaping Economic Growth (with Ufuk Akcigit, Y. Emre Akgunduz, Harun Alp, and Seyit M. Cilasun)
  We study the effects of size-dependent regulations in a dynamic model in which heterogeneous firms spend resources to grow by improving their productivity and can rely on informality in the labor market. We use the model to study firms in Turkey, where labor market regulations make operation more costly for firms with more than 50 employees. We find that firms rely more on informality to avoid the burden of size-dependent regulations: the overall share of informality would be lower by 5.9% in the absence of regulation. Additionally, size-dependent policies take a higher toll on firms with high growth potential. In a counterfactual economy without distortion, the share of these firms would increase by 2.5%, and the share of firms with more than 50 employees would increase by 78%. Finally, without regulation, economic growth and welfare would increase by 1.9% and 0.6%, respectively.