Search and Matching Models of Labor Markets in Developing Economies
This dissertation consists of two essays studying the macroeconomics of labor markets with search frictions in developing economies.The first essay evaluates the impact of market-oriented structural reforms, in particular labor market policies, social assistance programs, and trade liberalization upon long run unemployment, wage inequality and the distribution of employment across sectors in a small open economy with search frictions and idiosyncratic produc- tivity shocks. A search and matching model of a labor market with a large informal sector is built and estimated by Simulated Method of Moments using Colombian household-level data. Results show that changes in labor taxes may have sizable aggregate, compositional and distributional effects if workers associate high payroll taxes with more valuable and efficient social security services. The higher the val- uation of SS services, the more progressive these labor market policies become. An expansion of public health insurance to informal sector workers has minor aggregate and distributional effects. Changes in relative prices that negatively affect the relative profitability of the formal sector have quite sizable aggregate effects, producing more long run unemployment and informality, and increasing unemployment duration by 9 weeks. Distributional effects are modest.The second essay (co-authored with James Albrecht and Susan Vroman) studies the interactions between private and public-sector labor markets by extending the standard Diamond-Mortensen-Pissarides model of equilibrium unemployment to incorporate public-sector employment. The model is calibrated using Colombian household-level data to investigate the effects of public-sector wage and employment policy on the employment and unemployment rates, as well as the distributions of wages, productivities and human capital levels across sectors. The model matches well selected moments of skill-specific labor market variables. Results indicate that doubling the size of the public sector may crowd out private employment and increase the unemployment rate by 1.3 percentage points, but may also narrow the log-wage gap and reduce log-wage inequality (standard deviation is decreased by 3.4 per- centage points). Changes in the public-sector wage rule have minor impact on the employment and unemployment rates but have more sizeable distributional effects. While eliminating the "pure" public-sector premium leads to a small reduction in the log-wage gap of 0.062 log-wage points, placing more weight on formal qualifications when setting public-sector wages reduces the public-sector gap significantly by 0.309 log-wage points.