English
Valencià
Labor informality, common in Latin American economies, is both a cause of low productivity and vulnerability, and a buffer that mitigates job destruction after negative shocks. During the COVID-19 pandemic, informality is also associated with a higher risk of contagion, thus reducing the willingness of households to get involved in informal activities. To understand and quantify the effect of these mechanisms on the economy during the health crisis, we propose a SIR model featuring a dual labor market, where households imperfectly substitute informal and formal consumption, and calibrate it to Colombian and Peruvian data. Considering a higher risk of contagion from the informal sector increases the size of the recession, whereas having less rigidities in markets allows for a faster recovery. Targeting transfers and using selective lockdowns have best epidemiological effect as its non-targeted counterparts, but at a lower economic cost.
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