Unemployment Dynamics With Informality: An Empirical Analysis for a Developing Country

ABSTRACT We implement decompositions of cyclical unemployment for a developing country in which we divide the employment state into formal and informal states. Using the conventional steady‐state decomposition, the results show that the contributions of the formal sector to the margins of job separation and job finding are balanced, while the contributions of the informal sector to these two margins are quite uneven. Given the debate about the adequacy of methods that rely on the steady‐state unemployment as a good proxy for current unemployment in countries other than the United States, we use alternative decomposition methods and confirm the robustness of the steady‐state results.