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The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data

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Author Info

  • Olivier Bargain

    (UCD Geary Institute)

  • Prudence Kwenda

    (University College Dublin)

Abstract

This paper provides new evidence on the wage gap between informal and formal salary workers in South Africa, Brazil and Mexico. We use rich datasets that allow us to define informality in a relatively comparable fashion across countries. We compute precise wage differentials by accounting for taxes paid in the formal sector. For each country, we analyze how the sector wage gap varies within groups, between groups and over time. To account for unobserved heterogeneity, we use large (unbalanced) panels to estimate fixed effects models at the mean and at different quantiles of the wage distribution. We find that unobserved heterogeneity explains a large part of the (conditional) wage gap. The remaining informal sector wage penalty is large in the lower part of the distribution but almost disappears at the top. The penalty primarily concerns young workers and is found to be procyclical. We carefully investigate the robustness of these results and discuss their policy implications as well as regularities across countries.

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Bibliographic Info

Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200916.

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Length: 27 pages
Date of creation: 10 Jun 2009
Date of revision:
Handle: RePEc:ucd:wpaper:200916

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Keywords: wage gap; informal sector; quantile regression; fixed effects model; selection;

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References

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Cited by:
  1. Aysit Tansel & Elif Oznur Kan, 2012. "The Formal/Informal Employment Earnings Gap: Evidence From Turkey," ERC Working Papers 1204, ERC - Economic Research Center, Middle East Technical University, revised Apr 2012.
  2. John P. Haisken-DeNew & Maren M. Michaelsen, 2011. "Migration Magnet: The Role of Work Experience in Rural-Urban Wage Diff erentials in Mexico," Ruhr Economic Papers 0263, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  3. Arbex, Marcelo & Galvao, Antonio F. & Gomes, Fábio Augusto Reis, 2010. "Heterogeneity in the Returns to Education and Informal Activities," Ibmec Working Papers wpe_216, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  4. Maria Manuel Campos & Mário Centeno, 2011. "Public-private wage gaps in the period prior to the adoption of the euro: an application based on longitudinal data," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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