TY  - JOUR
AU  - Agenor,Pierre-Richard
AU  - Aizenman,Joshua
TI  - Macroeconomic Adjustment with Segmented Labor Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4769
PY  - 1994
Y2  - June 1994
UR  - http://www.nber.org/papers/w4769
L1  - http://www.nber.org/papers/w4769.pdf
N1  - Author contact info:
Pierre-Richard Agenor
School of Social Sciences, University of Mancheste
Manchester M139PL, United Kingdom
E-Mail: Pierre-richard.Agenor@manchester.ac.uk

Joshua Aizenman
Economics and SIR
USC
University Park
Los Angeles, CA 90089-0043
Tel: 213-740-4066
E-Mail: aizenman@usc.edu
AB  - This paper analyzes the macroeconomic effects of fiscal and labor market policies in a small open developing country.  The basic framework considers an economy with a large informal production sector and a heterogeneous work force.  The labor market is segmented as a result of efficiency considerations and minimum wage laws.  The basic model is then extended to account for unemployment benefits, income taxation, and imperfect labor mobility across sectors. Under the assumption of perfect labor mobility, we show that a permanent reduction in government spending on nontraded goods leads in the long run to a depreciation of the real exchange rate, a fall in the market-clearing wage for unskilled labor, an increase in output of traded goods, and a lower stock of net foreign assets.  A permanent reduction in the minimum wage for unskilled workers improves competitiveness, and expands the formal sector at the expense of the informal sector.  Hence, in a two-sector economy in which the minimum wage is enforced only in the formal sector and wages in one segment of the labor market are competitively determined, efficiency wage considerations do not alter the standard neoclassical presumption.  A reduction in unemployment benefits is also shown to have a positive effect on output of tradable goods by lowering both the level of efficiency wages and the employment rent of skilled workers.
ER  -