Earnings Premiums and Penalties for Self-Employment and Informal Employees around the World

This paper examines the earnings premiums associated with different types of employment in 73 countries. Workers are divided into four categories: Non-professional own-account workers, employers and own-account professionals, informal wage employees, and formal wage employees. Approximately half of the workers in low income countries are nonprofessional own-account workers and the majority of the rest are informal employees. Fewer than 10% are formal employees, and only 2% of workers in low income countries are employers or own-account professionals. As per capita GDP increases, there are large net shifts from non-professional own account work into formal wage employment. Across all regions and income levels, non-professional own-account workers and informal wage employees face an earnings penalty compared to formal wage employees. But in low income countries, this earnings penalty is small, and non-professional own-account workers earn a positive premium relative to all wage employees. Earnings penalties for non-professional own account workers tend to increase with GDP and are largest for female workers in high income countries. Men earn greater premiums than women for being employers or own-account professionals. These results are consistent with compensating wage differentials and firm quasi-rents playing important roles in explaining cross-country variation in earnings penalties, and raise questions about the extent to which the unskilled self-employed are rationed out of formal wage work in low-income countries.