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Essays on Wage Inequality and Employment Informality


This dissertation develops models to understand changes in the wage distribution and employment informality rates. Common themes are imperfect competition in the labor market, firm and worker heterogeneity, imperfect substitution between different levels of skill in production, and minimum wages. In each chapter, I present a model, discuss its properties, estimate it using Brazilian data, and use it for counterfactual analysis.

In the first chapter, I build a tractable framework for analyzing the equilibrium effects of labor supply shocks, technical change, and minimum wages in an imperfectly competitive labor market environment with worker and firm heterogeneity. Goods are produced using task-based technologies exhibiting imperfect substitution between worker types. Firms specialize in the production of particular goods, which leads to differences in task requirements, entry costs, and workplace amenities. These differences generate firm heterogeneity in skill intensity, size, and wages. The model has three advantages relative to the canonical supply-demand-institutions framework typically used to study trends in wage inequality. First, task-based production with multiple worker types allows for plausibly rich formulations of the structure of technical change. Second, the model accounts for equilibrium effects of minimum wages, compressing the wage distribution and generating spillovers on quantiles where the minimum wage does not bind. Third, the model makes predictions regarding labor market sorting and cross-firm wage dispersion. I take a simple version of the model to Brazilian matched employer-employee data and show that it can fit several aspects of wage inequality: differences in mean log wages between educational groups, within education group variances, and two-way variance decompositions of log wages into worker and firm components. The model also matches reduced-form estimates of minimum wage spillovers. I use the estimated parameters to decompose observed changes in inequality and sorting into components attributable to increasing schooling achievement, technical change, and a rising minimum wage. Falling wage inequality in Brazil is primarily due to the minimum wage, while rising worker-firm assortativeness is found to be driven by technical change. The decomposition exercise also illustrates how responses to supply and demand shocks differ qualitatively from those predicted by models with a representative firm.

The second chapter is coauthored with Rodrigo R. Soares. We develop a search model of informal labor markets with worker and firm heterogeneity, intra-firm bargaining with imperfect substitutability across types of workers, and a comprehensive set of labor regulations, including minimum wage. Stylized facts associated with the informal sector, such as smaller firms and lower wages, emerge endogenously as firms and workers decide whether to comply with regulations. Imperfect substitutability across types of workers and decreasing returns to scale enable the model to reproduce empirical patterns incompatible with existing frameworks in the literature: the presence of skilled and unskilled workers in the formal and informal sectors, the rising share of skilled workers by firm size, and the declining formal wage premium by skill level. These features also allow us to analyze the equilibrium responses to changes in the demand and supply of different types of labor. We estimate the model using Brazilian data and show that it closely reproduces the decline in informality observed between 2003 and 2012. The change in the composition of the labor force appears as the main driving force behind this phenomenon. We illustrate the use of the model for policy analysis by assessing the effectiveness of a progressive payroll tax in reducing informality.

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