The role of the informal sector in the COVID crisis:

Labor informality is a cause of low productivity and vulnerability, but also a buffer that mitigates job destruction in the presence of negative shocks. In the current circumstances, informality is also associated with a higher risk of contagion, reducing households' activity in informal activities. To understand and quantify these mechanisms, we propose a SIR model with a dual labor market, where households imperfectly substitute formal and informal consumption, and calibrate it to replicate the Colombian economy. The inclusion of higher contagion risk in the informal sector doubles the size of the recession, while having fewer rigidities in markets helps a faster recovery. The targeting of transfers and the use of selective confinements have a similar epidemiological effect to their untargeted counterparts, but at a lower economic cost. The paper also shows the inconvenience of prolonged quarantines.