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Skill differentiation between formal and informal employment

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Author Info

  • Enlinson Mattos
  • Laudo M. Ogura

Abstract

Purpose – The purpose of this paper is to examine the existence of skill differentiation between formal and informal labor markets. Design/methodology/approach – First, a theoretical model is developed under the assumption that concealment of production is increasingly costly for informal firms. Second, using data on the Brazilian self-employed economy, two methods are utilized to compare earnings in the formal versus the informal economy: propensity score and instrumental variable (IV) methods. For the IV estimations, state-level variables are used as instruments for individual's decisions. In addition, the effect of schooling on formality choice is analyzed. Findings – The theoretical model implies that more productive firms tend to operate formally and the proportion of workers employed by formal firms is larger for higher skilled workers. In the empirical analysis, it is found that formal firms are more productive than informal firms, controlling for workers' characteristics, and that higher workers' skill increase the probability of formal operation, as predicted by the theoretical model. Originality/value – The paper provides an original theoretical model of skill differentiation in labor markets and empirically evaluates the implications of the model.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Economic Studies.

Volume (Year): 36 (2009)
Issue (Month): 5 (October)
Pages: 461-480

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Handle: RePEc:eme:jespps:v:36:y:2009:i:5:p:461-480

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Related research

Keywords: Brazil; Developing countries; Labour market; Skilled workers; Skills;

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Cited by:
  1. Araujo, Ricardo Azevedo, 2011. "Lyapunov Stability in an Evolutionary Game Theory Model of the Labor Market," MPRA Paper 29957, University Library of Munich, Germany.
  2. Araujo, Ricardo Azevedo & Moreira, Helmar Nunes, 2011. "Lyapunov stability in an evolutionary game theory model of the labor market," MPRA Paper 36932, University Library of Munich, Germany.
  3. Araujo, Ricardo Azevedo & Loureiro, Paulo Roberto & Souza, Nathalia Almeida, 2011. "An Empirical Evaluation of an Evolutionary Game Theory Model of the Labor Market," MPRA Paper 30408, University Library of Munich, Germany.
  4. Arbex, Marcelo & Galvao, Antonio F. & Gomes, Fábio Augusto Reis, 2010. "Heterogeneity in the Returns to Education and Informal Activities," Insper Working Papers wpe_216, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.

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