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Unpublished Paper
Informality, Labor Regulation, and the Business Cycle
Banco De Mexico, Documento de Discusión 2018-19 (2018)
  • Carlos Urrutia
  • Gustavo Leyva, Banco de México
We analyze the joint impact of employment protection and informality on macroeconomic volatility and the propagation of shocks in emerging economies. For this, we propose a small open economy business cycle model with frictional labor markets, labor regulation and an in- formal sector, modeled as self-employment. The model is calibrated to the Mexican economy, in particular to business cycle moments for employment and informality obtained from our own calculations with the ENOE survey. We show that interest shocks, which affect specifically job creation in the formal sector, are key to obtain a counter-cyclical informality rate. In our model, confronted with similar shocks, the economy without an informal sector features higher volatility in employment and consumption, but smaller fluctuations in TFP and output. Moreover, an economy with informality but a lower burden of labor regulation to the formal sector would experience larger volatility in employment but smaller TFP and output fluctuations.
  • Business Cycles,
  • Emerging Economies,
  • Informal Sector,
  • Labor Markets,
  • Employment Protection
Publication Date
Citation Information
Carlos Urrutia and Gustavo Leyva. "Informality, Labor Regulation, and the Business Cycle" Banco De Mexico, Documento de Discusión 2018-19 (2018)
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