Center for Policy Research

Working Paper

Labor Market Policies in a Roy-Rosen Bargaining Economy

Hugo Jales & Zhengfei Yu

May 2020

Hugo Jales

Economics Department

Center for Policy Research

Labor

Hugo Jales

Abstract

The authors study the effects of labor market policies using a bargaining model featuring compensating differentials (Rosen, 1986) and self-selection (Roy, 1951). The framework allows them to create a taxonomy of formal and informal employment. The authors use the model to estimate the effects of the minimum wage for the Brazilian economy using the “PNAD" dataset for the years 2001-2005. Their results suggest that, although the minimum wage generates unemployment and reallocation of labor to the informal sector, the policy might be desirable if the employment losses are concentrated in jobs characterized by low surplus.

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