The paper describes the process of employment generation in formal and informal segments of an industry. Given productivity-heterogeneity of firms, enforcement of minimum wage law creates different employment effects across firms.
We provide an analysis of enforcement policies applicable to formal sector in dual labor markets. Using a framework with heterogeneous firms, endogenous determination of informal wage and politically dictated enforcement strategies, we show that firms which operate both in the formal and informal sectors do very little to increase employment when faced with the opportunity of hiring workers in the informal labor market. Thus enforcement of labor laws and other regulations should not have aggregate employment effects, particularly when workers are productively homogeneous. For firms operating exclusively in the informal sector, the outcome is different. Taxing the more productive seems to be the optimal strategy.
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Sugata Marjit and Saibal Kar
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