Labor Market Search, Informality, and On-The-Job Human Capital Accumulation
We develop a search and matching model where firms and workers produce outputthat depends both on match-specific productivity and on worker-specific human capi-tal. The human capital is accumulated while working but depreciates while searchingfor a job. Firms optimally post the formality status wages are determined by bar-gaining. The equilibrium is characterized by an endogenous steady state distributionof human capital and by an endogenous formality rate. We estimate the model onlabor market data from Mexico. We find that human capital accumulation on-the-jobis responsible for about one third of the overall value of production. We also find thathuman capital upgrading is slower while working informally than formally. This mag-nifies the negative impact on productivity of the labor market institutions that giveraise to informality.