Labor Markets and Productivity in Developing Countries

In middle-income countries, the informal sector often accounts for a substantial fraction of the urban labor force. We develop a general equilibrium model with matching frictions in the urban labor market, the possibility of self-employment in the informal sector, and scope for rural-urban migration. We investigate the e¤ects of di¤erent types of growth on wages and the informal sector, and the extent to which labor market institutions can in?uence aggregate productivity. We quantify these e¤ects by calibrating the model to data for Mexico.