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Exclusive goods and formal-sector employment


Föllmi, Reto; Zweimüller, Josef (2011). Exclusive goods and formal-sector employment. American Economic Journal: Macroeconomics, 3(1):242-272.

Abstract

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.

Abstract

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.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:January 2011
Deposited On:26 Jan 2012 13:19
Last Modified:07 Dec 2017 11:50
Publisher:American Economic Association
ISSN:1945-7715
Publisher DOI:https://doi.org/10.1257/mac.3.1.242
Other Identification Number:merlin-id:4410

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