LABOR MARKET SEARCH, INFORMALITY, AND SCHOOLING INVESTMENTS

This paper develops a search and matching model where firms workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering labor market whether for job as unemployed self-employed. Firms decide formality status bargain with over wages. The resulting equilibrium size informal sector is an endogenous function parameters institutions. focuses on increasingly important institution: “dual” social protection system whereby contributory benefits in coexist non-contributory sector. Preferences estimated system—together all other structural market—using force survey data from Mexico time-staggered entry across municipalities program. Policy experiments show informality may reduced by either increasing decreasing payroll tax rate They also universal security benefit would decrease informality, incentivize schooling, increase productivity at relative fiscal cost similar generated current system.