The Analytics of Segmented Labor Markets

This paper provides an analytical overview of models of segmented urban labor markets in developing countries. It begins by reviewing the characteristics of the labor market in these countries, including institutions and regulations that may lead to segmentation. The wage and employment e?ects of imperfect labor mobility between the formal and informal sectors are then illustrated with a simple graphical analysis. Formal models of urban wage formation are discussed next, and a two-sector shirking model with segmented urban labor markets is presented. The model is used to analyze the impact of an increase in the minimum wage on unskilled unemployment.