Dual Labor Market in a Dynamic Stochastic General Equilibrium Model of Iran

The substantial share of informal employment in Iran، on the one hand and the growing use of dynamic stochastic general equilibrium models in analyzing economic policies by central banks and eliminating the flaws of these models، on the other hand، necessitate designing a dynamic stochastic general equilibrium model with dual labor market based on Iran''s economy. To do so، the current study divides labor market into formal and informal sectors. In addition، it classifies firms in formal and informal ones regarding the type of the production function and labor. The annual data used in the model are collected from the Central Bank and the Statistical Center of Iran during 1974-2010. After calibrating and solving the model with numerical method، the shock effects of total factors productivity، government expenditure، oil revenue، and money growth on real variables of the model have been analyzed with and without nominal wage rigidity. The results of the study suggest that the informal sector of the labor market in different business cycles acts as a buffer with countercyclical shift. The money is not neutral in the short run due to lack of rigidity in a model of monopolistic competition، so money supply affects real variables of economy.