I build a business cycle labor search-and-matching model with informal labor markets, which shows that different dimensions of institutional quality have similar effects on the size of the informal sector, but different effects on the relationship between informality and long-run macroeconomic outcomes and between informality and labor market volatility. For the same change in informal sector size, changes in different proxies for institutional quality have contrasting quantitative implications for the steady state and the volatility of the labor market, despite having similar consequences on other macroeconomic variables. These results highlight the importance of identifying the source behind changes in the size of the informal sector to characterize the link between informality and business cycle dynamics.


Additional Information

Print ISSN
pp. 77-112
Launched on MUSE
Open Access
Archive Status
Will Be Archived 2022
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