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Unpublished Paper
Informality, Labor Regulation, and the Business Cycle
  • 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, employment protection and an informal 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 macroeconomic volatility. However, an economy with low levels of employment protection would experience larger volatility in employment but smaller TFP and output fluctuations. 
  • Business Cycles,
  • Emerging Economies,
  • Informal Sector,
  • Labor Markets,
  • Employment Protection
Publication Date
August, 2017
Citation Information
Carlos Urrutia and Gustavo Leyva. "Informality, Labor Regulation, and the Business Cycle" (2017)
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