In middle-income countries, the informal sector often accounts for a substantial fraction of the urban labor force. We develop a general equilibrium model with matching frictions in the urban labor market, the possibility of self-employment in the informal sector, and scope for rural-urban migration. We investigate the effects of different types of growth on wages and the informal sector, and the extent to which labor market institutions can influence aggregate productivity. We quantify these effects by calibrating the model to data for Mexico.
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An older version circulated under the title "Growth and Labour Markets in Developing Countries", available as a Bristol working paper dp06581.pdf. The older version includes two theories of urban wage determination, rather than just one.
See also:
Dual economy models: a primer for growth economists
Dualism and cross-country growth regressions
Growth and wage inequality in a dual economy