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,...