Social programs can reduce productivity and growth as they inadvertently generate perverse incentives for workers and firms. The core hypothesis is that these programs segment the labor market, tax formal salaried employment and subsidize informal salaried and non-salaried employment. Larger...

This paper develops a search and matching model where firms and workers are allowed to form matches (jobs) that can be formal or informal. Workers optimally choose the level of schooling acquired before entering the labor market and whether to search for a job as unemployed or as self-employed....

Over the last two decades Mexico has had an open trade regime, experienced macroeconomic stability, and made substantial progress in education. However, average workers¿ earnings have stagnated and earnings for workers with more schooling have declined, compressing the earnings distribution and...