Seminario CEDE - Hernando Zuleta

Labor informality, common in Latin American economies, is both a cause of low productivity and vulnerability, and a buffer that mitigates job destruction after negative shocks. In the current circumstances, informality is also associated with a higher risk of contagion, thus reducing the willingness of households to get involved in informal activities. To understand and quantify these mechanisms, we propose an SIR model featuring a dual labor market, where households imperfectly substitute informal and formal consumption, and calibrate it to Colombian and Peruvian data. Considering a higher risk of contagion from the informal sector doubles the size of the recession, whereas having less rigidities in markets allows for a faster recovery. Targeting transfers and using selective lockdowns have a similar epidemiological effect as its non-targeted counterparts, but at a lower economic cost. The paper also casts light on the inconvenience of long lockdowns.

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