Exclusive Goods and Formal-Sector Employment
American Economic Journal: Macroeconomics
vol. 3,
no. 1, January 2011
(pp. 242-72)
Abstract
We explore how the underemployment problem of less-developed economies is related to income inequality. Consumers have nonhomothetic preferences over differentiated products of formal-sector goods and thus inequality affects the composition of aggregate demand via the price-setting behavior of firms. We find that high inequality divides the formal sector into mass producers and exclusive producers (which serve only the rich); high inequality generates an equilibrium where many workers are crowded into the informal economy; and an increase in subsistence productivity raises the unskilled workers' wages and boosts employment due to the higher purchasing power of poorer households. (JEL D31, D43, E24, E26, J24)Citation
Foellmi, Reto, and Josef Zweimüller. 2011. "Exclusive Goods and Formal-Sector Employment." American Economic Journal: Macroeconomics, 3 (1): 242-72. DOI: 10.1257/mac.3.1.242JEL Classification
- D31 Personal Income, Wealth, and Their Distributions
- D43 Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
- E26 Informal Economy; Underground Economy
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity
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