Global Challenges Seminar Series
Francesco Amodio (McGill University) on “Labor market power and informality in Peru” organised by the Centro Studi Luca d’Agliano, BAFFI CAREFIN and the Department of Economics, Management and Quantitative Methods (University of Milan) in collaboration with the Dipartimento di Economia, Metodi Quantitativi e Strategie di Impresa (Università Milano Bicocca), and the Dipartimento di Ingegneria Gestionale (Politecnico di Milano).
When employers face little competition for labor, i.e. have labor market power, they can suppress wages below marginal productivity. Labor market power and its consequences have rarely been studied in low-income countries, despite the existence of substantial labor market frictions affecting the overall extent of competition among employers, and large levels of informality affecting the workers’ employment opportunities. This paper studies the extent and implications of labor market power in Peru. We present a general equilibrium model where labor market power results from (i) worker selection across formal employment and informal self-employment, and (ii) labor market concentration. The theory highlights the equilibrium relationship between labor market power, informality, wages and income. Using firm and household-level data, we document variation in the extent of concentration across local labor markets over time. We show that when labor market concentration is high wages are low for both formal employees and informal self-employed. Moreover, informal self-employment rates are larger, and average skill levels are lower in both the formal and informal sectors. This is consistent with our model and a scenario where worker ability in the formal and informal sector are strongly positively correlated, but returns from informal self-employment are more dispersed.