Race among equals? An inquiry into the segmentation of Indian labor market

Whether identical workers are treated homogeneously in different sectors indicates how segmented labor markets are. In this study, we test for segmentation in the Indian labor market by using unit‐level data from two rounds of nationally representative data each round comprising of nearly half a million individuals for the period 2004–2005 and 2011–2012. We use the finite mixture model (FMM) estimation and correct for selection bias to find the existence of two segments of considerable size in informal sector. We identify statistically different latent segments without a priori definition of the segments. Workers in the upper segment of informal employment receive higher returns to education and skills relative to those in the lower segment. Women earn less than men in both segments of informal and formal employment. The gender–wage disparity, however, is less pronounced in the lower segment of informal employment. Furthermore, we estimate the size of involuntary informal employment to be more than 40% of the entire informal employment. Our findings on unobserved heterogeneity suggest the need to rethink about binaries in the labor market as ideas of formal and informal employment lose relevance when multiple latent segments coexist. The study has potential implications for design of labor policies, skilli development programs, and labor legislation.