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Aspects Of Informalization And Income Distribution In Developing Countries: A Modified Specific Factors Approach, Arslan Razmi

Economics Department Working Paper Series

This paper explores aspects of increased informalization in developing countries with the help of a modified specific factors model with a fixed nominal wage in the formal sector, which is assumed to have a “lighthouse” effect on the informal sector wage. Both sectors produce a tradable good each, with informal sector production being embedded in international production networks. Comparative dynamic exercises that attempt to simulate recent economic developments in many developing countries yield plausible results, and suggest various channels for increased informalization. Contrary to standard sticky wage models, wage suppression in the formal sector leads to informalization. Changes in factor …