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The Growth Lab's Research Seminar series is a weekly seminar that brings together researchers from across the academic spectrum who share an interest in growth and development.

Speaker: Santiago Franco, Assistant Professor of Economics at Boston University

Abstract: We investigate how labor informality affects wage dynamics, skill formation, and economic growth. Using longitudinal worker data from Chile, we first document three empirical facts: (i) formal workers earn significantly higher wages than informal workers throughout their life cycle, driven by both a levels effect and a growth effect; (ii) nearly half of the formal-informal wage gap in levels is explained by the sorting of high-skilled workers into formal jobs; and (iii) formal workers experience faster wage growth over time, consistent with learning from higher-skilled peers. Then, to rationalize these findings, we develop a heterogeneous-agent endogenous growth model in which workers choose between formal and informal employment based on current skills, learning opportunities, and labor market regulations. Workers accumulate human capital through interactions with more skilled peers. In equilibrium, more knowledgeable workers sort into the formal sector, and the economy’s growth rate depends on the overall skill distribution and workers’ interaction rates with highly skilled formal peers. Finally, we structurally estimate the model’s parameters to quantify the impact of formalization policies. We find that policies that decrease the cost of hiring formal workers are more effective in reducing the size of the informal sector compared to policies that increase the cost of hiring informal workers. However, both types of policies have adverse effects on economic growth by lowering the quality of interactions among more skilled workers.

Link to the paper:

Speaker Bio: Santiago Franco is an Assistant Professor of Economics at Boston University. His research explores how spatial frictions and labor market institutions shape productivity, competition, and economic growth. He shows how output market power leads to spatial misallocation, offering a rationale for place-based policies. His work also shows how informality impacts wage growth and skill formation in developing economies. Santiago holds a Ph.D. in Economics from the University of Chicago. His work combines structural modeling with rich microdata.