Oktiyanto, Fajar2026-06-112026-06-11https://hdl.handle.net/1885/733810327This thesis encompasses three papers that examine the dynamics of earnings and the misallocation of resources in developing nations. The papers provide a more detailed analysis of the labour market in Indonesia and how the duality of the labour market, comprising both formal and informal sectors, affects earnings shocks and inequality. Additionally, we assess the aggregate implications of capital and labour misallocations resulting from the limited transition between different sectors within the labour market. Moreover, we discuss the misallocation that arises from the perspective of firms, attributed to the markup. The first paper examines earnings dynamics and inequality in developing countries characterised by fragmented labour markets and prevalent informality. Our analysis reveals an increasing disparity in earnings between the two sectors throughout the study period. Earnings growth for the informal sector has consistently lagged across all income groups. Additionally, transitions between the two sectors exhibit rigidity and asymmetry, with a negligible percentage of informal workers able to transition to the formal sector, thereby exacerbating persistent earnings inequality. Our findings also indicate that labour earnings tend to be less volatile in the formal sector; however, substantial downside risks remain. In contrast, informal workers encounter symmetric earnings risks and experience less severe shocks. The adjustments in the labour market activities of household members can partially mitigate earnings fluctuations, while private transfers within social networks can have a more pronounced effect. The second paper studies the extent to which the existence of informality affects the allocation of labour and capital in developing countries. We first document employment segregation and the degree of labour mobility in a highly persistent informal setting. We develop a dynamic general equilibrium model equipped with occupational choice features for the formal and informal sectors to assess aggregate efficiency and inequality implications. We found that the existence of informality results in stifled output and is mainly contributed to by low labour mobilisation between employment sectors. Furthermore, low labour mobilisation goes hand in hand with low capital accumulation. When labour is mobilised to the formal sector, there will be more capital accumulation in the economy, and their impact on output will be magnified. Labour mobilisation affects inequality differently, depending on sector-specific shocks. If a trade-off exists, which refers to the balance between efficiency and equality, higher labour mobility will lower this trade-off. The final paper explores the relationship between markup and misallocation and its implications for productivity, employment, and output in developing countries. Older firms, particularly foreign-owned, tend to exhibit higher markups, reflecting greater price-cost disparities. Similarly, high-productivity firms, especially foreign entities, command higher markups, often linked to reduced net employment growth. We then investigate the underlying mechanisms through a theoretical model that combines imperfectly competitive product market competition with Schumpeterian growth dynamics. Our analysis reveals that the creative destruction channel plays a crucial role in shaping markup differences between foreign and domestic firms. A significantly lower entry rate for foreign firms leads to higher and more dispersed markups, exacerbating misallocation in total factor productivity (TFP) and reducing the labour share of income. Relaxing entry barriers for foreign firms can lower both average markups and their dispersion, reducing TFP misallocation and mitigating labour share losses. These effects are particularly pronounced when foreign firms operate across multiple markets rather than being restricted to a few.en-AU202610.25911/4EVC-5T87