Abstract
This paper seeks to estimate the impact of sector specific international price shocks on informal employment demand. Such impact is specified by a theoretical model where law enforcement (regulation) is an important determinant of the formal-informal employment demand allocation decision. It is shown that trade-openness effects on informality are channeled through prices, thus the proposed price-informality multiplier is interpreted as a formal labour vulnerability to trade openness proxy indicator. By combining national accounts and labour force survey data the multiplier is estimated for a set of tradable sectors of the Peruvian economy for 2004-2013. The theoretical and empirical evidence suggests the presence of structural sector specific ‘informality traps’. It also raises awareness regarding the need of sector specific regulatory frameworks that could ease the regulatory burden at firms exhibiting structural proneness to formality.
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