Segmented Labor Market Models in Developing Countries

Labor markets are important, because most people, especially the poor, derive all or the great bulk of their income from the work they do. This paper approaches labor markets through models of segmented labor markets. The first main substantive section presents the essence of segmented labor market modeling, in particular, the role of labor market dualism. Given that labor markets often consist of quite distinct segments, a useful and insightful analytical approach is to start with just two interrelated segments, which here are termed formal and informal. Accordingly, the next sections present models of wages and employment in the formal sector, the informal sector, and the linkages between the two respectively. The final substantive section shows the contributions that these models make to understanding and policy analysis in labor markets. It would not be expected that the same model would fit East Africa and East Asia or South Africa and South Korea. Surely, the “correct” model is context-specific. Blending empirical observation and analytical modeling has yielded great advances. Sound labor market policies require sound labor market models