While the phenomenon of informality in labor markets is pervasive in many parts of the world, its interaction with the aggregate behavior of economies is not well understood. In this dissertation, I explore the connection between informality and the macroeconomy in two main ways. The first way is to augment a search-and-matching model of labor markets in the tradition of Mortensen and Pissarides (1994) with aggregate shocks and an informal sector. The second is to consider an Aiyagari (1994) setting in which the existence of an informal sector feeds back into the labor income risk and savings decisions of heterogeneous agents. The parameters of both models are chosen so as to match features of micro-data I obtain from Brazil. This dissertation is thus divided into three chapters: the first one presents the data and findings from the empirical exploration. The second chapter describes the model of informality over the business cycle and presents its results. The third chapter introduces the heterogeneous agents model with informality and the conclusions derived therefrom. The first chapter divides the empirical analysis into two components. Firstly, I analyze how informality is distributed over education, income and occupational groups, and how formal-informal income differentials behave over these categories. I find that informality decreases in average income, and that the formal-informal income differential is higher among low income workers. The second component pertains to the evolution of informality over time. I show that, in the time period covered by the data, the rate of informality has a strongly cyclical pattern, which is mostly explained by cyclical variation in formal job creation. In the second chapter, in co-authorship with Livio Maya, we show in a parsimonious model of business cycles and informal labor markets that the differential risk of formal and informal contracts plays a potentially important role in generating the patterns of job creation found in the data. The main finding is that generating substantial countercyclicality in the informality rate in our calibration requires the price of risk to be highly countercyclical. In the third chapter, also in co-authorship with Livio Maya, we show the transition path of a policy designed to fight informality in a heterogeneous agents setting. The main finding is that while eliminating the informal sector makes the economy more productive and reduces unemployment in the long run, the short term impact is influenced by general equilibrium effects. In particular, unemployment increases in the short run due to the impact of the policy on interest rates. Moreover, the effects of such policy are sensitive to the assumptions on the destination of the extra tax revenues derived from increased formalization in the transition path.

In this thesis, return to health is also estimated. We examine the effects of height on hourly wage, monthly earnings, working hours, and education level. Our results show that height has different causal impacts on women and men. Women benefit from height: taller women earn more, work less, and have more leisure time. However, taller men are more likely to land a job and work longer, largely because they are better endowed. Moreover, the positive effect of height on hourly wage for women is larger than that for men. In general, the findings have contributed new evidence to existing literature that estimates the return to health. / This thesis mainly investigates the intergenerational transmission of socioeconomic status. Specifically, it estimates the effects of family income and parental education on the health status and educational attainment of the next generation using unique twins data collected from urban China. By using twins strategy, we can largely control for unobservables, which may cause biases in estimations. Our results show that the positive correlations of family income and maternal education with child health are largely due to unobserved endowment and family background. However, family income and paternal education do have a positive effect on child education. Overall, our findings suggest that increasing family income and parental schooling do not help in improving child health. However, to reduce the educational gap of the next generation, redistributing income would prove beneficial. The design of government policies is dependent on the policy targets. / Xiong, Yanyan. / Advisers: Hongbin Li; Junsen Zhang. / Source: Dissertation Abstracts International, Volume: 70-06, Section: A, page: 2176. / Thesis (Ph.D.)--Chinese University of Hong Kong, 2008. / Includes bibliographical references. / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. [Ann Arbor, MI] : ProQuest Information and Learning, [200-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. Ann Arbor, MI : ProQuest dissertations and theses, [201-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Abstracts in English and Chinese. / School code: 1307.