In this article, we build an equilibrium search and matching model of an economy with an informal sector. Our model extends <link rid="b20">Mortensen and Pissarides (1994)</link> by allowing for "ex ante" worker heterogeneity with respect to formal-sector productivity. We use the model to analyse the effects of labour...

We show how time-varying unemployment benefits can generate equilibrium wage dispersion when identical firms post wages and homogeneous risk-averse workers search for jobs. We model a two-tier system similar to real-world UI programmes. The unemployed initially receive benefit "b". Eventually,...

The existing literature on inequality between private and public sectors focuses on cross-section differences in earnings levels. Forward-looking agents, however, care about income and job mobility too, which we show are substantially different between the two sectors. Using data from the BHPS,...

This paper models the relationship between income and reported well-being using latent class techniques applied to panel data from twelve European countries. Introducing both intercept and slope heterogeneity into this relationship, we strongly reject the hypothesis that individuals transform...