Labor Market Segmentation in a Two-Sector Model of An Open Economy

IMF Working Papers, April 1, 1990

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Labor Market Segmentation in a Two-Sector Model of An Open Economy

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Bibliographic details

• Authors: Dimitri G Demekas
• Published: April 1, 1990
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451979138.001

Model and scope

• Examines formally the effects of labor market segmentation in a two-sector open economy model.
• Defines the real exchange rate as the relative price of traded and home goods.
• Uses the model to analyze effects of two labor market policies:
  • increasing the degree of primary market coverage; and
  • implementing wage restraint in the primary market.

Key findings

• Increasing the degree of primary market coverage:
  • increases unemployment; and
  • leads to a real appreciation.
• Real wage restraint in the primary market:
  • reduces unemployment; and
  • has ambiguous but probably small effects on the real exchange rate.

Policy implications and interpretation

• Policies that expand primary market coverage can have adverse labor-market outcomes (higher unemployment) and affect external competitiveness through real appreciation.
• Wage restraint in the primary market can lower unemployment and is unlikely to induce large shifts in the real exchange rate, though the direction of the real exchange rate effect is ambiguous.