American Economic Journal: Macroeconomics
no. 1, January 2011
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)
Foellmi, Reto, and Josef Zweimüller.
"Exclusive Goods and Formal-Sector Employment."
American Economic Journal: Macroeconomics,
Personal Income, Wealth, and Their Distributions
Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
Informal Economy; Underground Economy
Human Capital; Skills; Occupational Choice; Labor Productivity