Modeling Labor Market Segmentation

In this paper, we develop a model that captures stylized facts of informal labor markets. We show how justice interference on informal contracts leads to penalties in the equilibrium wage of informal workers. We also state that, in a repeated game situation, an equilibrium where the wage gaps between formal and informal contracts diminish with the worker skills exists and is unique. These claims are supported by two assumptions: (i) the existence of a technology that makes possible a ?rm to buy information about the worker productivity and past actions; (ii) unskilled workers have a more homogenous productivity than the skilled workers.