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American Economic Journal: Macroeconomics: Vol. 3 No. 1 (January 2011)

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Exclusive Goods and Formal-Sector Employment

Article 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.3.1.242

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)

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Authors

Foellmi, Reto (U Berne)
Zweimüller, Josef (Institute for Empirical Research in Economics, U Zurich and IZA, Bonn)

JEL Classifications

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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American Economic Journal: Macroeconomics


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