David Morales

This work studies the complex relationship between financial access and the distribution of firms, labor, and capital across the formal and informal sectors. To understand this relationship, a credit supply shock is constructed using a modified Bartik-type instrument for Mexico. The expected results are a positive credit shock (1) increases wages, capital investment, and employment; and (2) reduces both intensive and extensive margins of informality. To understand the mechanisms of these relationships, this project proposes a simple wage posting model with heterogeneous firms in productivity that must decide on labor, capital, debt, and formality status. This setting creates a p-k-type for firms that depends on productivity and the level of capital. In this economy, there exists a unique threshold of productivity that makes formality more profitable. The main implication of the model is that, under certain conditions, changing the financial constraints yields a change in the extensive margin of formality and on the distribution of workers and capital across both sectors.

This paper investigates the puzzle of why the share of wage dispersion explained by firm fixed effects is larger in developing countries than in advanced economies. We argue that this difference is driven by the informal sector. Using the economic census and matched employer-employee data from Mexico’s manufacturing sector, we estimate AKM two-way fixed effects model à la Abowd, Kramarz, and Margolis (1999), within Local Labor Markets (LLM) stratified by quintiles of worker informality. We address the limited mobility bias of AKM estimations by leave-one-out correction procedures à la Abowd et al. We document that labor markets with higher informality exhibit firm effects with greater variance, account for a larger share of log wage variance, and have lower average levels. We interpret these findings as evidence of two different degrees of competition: strong levels of competition across formal and informal sectors, reducing firm effects, coexists with weak competition within the formal sector, amplifying firm effects dispersion. This interpretation is supported by descriptive evidence on the relationship between informality and market structure. These results suggest that cross-country differences in informality may account for the heterogeneity in firm effects observed between advanced and developing economies. A structural model is introduced to explore the mechanisms driving these patterns and to guide future research.