In this paper, we model a dynamic general equilibrium model of a small open developing economy. We model labor markets as including both formal and informal urban employment as well as rural employment. We find that modelling dual labor markets helps explain why output in developing economies may fall even as labor inputs remain constant during financial crises. An external financial shock may lead to a reallocation of labor from productive formal sectors of the economy to less productive informal sectors.
Cook, David, and Hiromi Nosaka. 2006. “Dual Labor Markets and Business Cycles,” Federal Reserve Bank of San Francisco Working Paper 2006-36. Available at https://doi.org/10.24148/wp2006-36