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Is Informality Bad? - Evidence from Brazil, Mexico and South Africa

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  • Olivier Bargain

    (University College Dublin)

  • Prudence Kwenda

    (University College Dublin)

Abstract

The informal sector plays an important role in the functioning of labor markets in emerging economies. To characterize better this highly heterogeneous sector, we conduct a distributional analysis of the earnings gap between informal and formal employment in Brazil, Mexico and South Africa, distinguishing between dependent and independent workers. For each country, we use rich panel data to estimate fixed effects quantile regressions to control for (time-invariant) unobserved heterogeneity. The dual nature of the informal sector emerges from our results. In the high-tier segment, self-employed workers receive a significant earnings premium that may compensate the benefits obtained in formal jobs. In the lower end of the earnings distribution, both informal wage earners and independent (own account) workers face significant earnings penalties vis-à-vis the formal sector. Yet the dual structure is not balanced in the same way in all three countries. Most of the self-employment carries a premium in Mexico. In contrast, the upper-tier segment is marginal in South Africa, and informal workers, both dependent and independent, form a largely penalized group. More consistent with the competitive view, earnings differentials are small at all levels in Brazil.

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Bibliographic Info

Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201003.

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Length: 28 pages
Date of creation: 29 Jan 2010
Date of revision:
Handle: RePEc:ucn:wpaper:201003

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Keywords: self-employed; salary work; informal sector; earnings differential; quantile regression; fixed effects model;

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Citations

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Cited by:
  1. Aysýt Tansel & Elif Öznur Kan, 2012. "The Formal/Informal Employment Earnings GAP: Evidence From Turkey," Working Papers 2012/23, Turkish Economic Association.
  2. Azuara, Oliver & Marinescu, Ioana, 2013. "Informality and the expansion of social protection programs: Evidence from Mexico," Journal of Health Economics, Elsevier, vol. 32(5), pages 938-950.
  3. Garcia Cruz, Gustavo Adolfo, 2014. "Labor Informality: Choice or Sign of Segmentation? A Quantile Regression Approach at the Regional Level for Colombia," MPRA Paper 55224, University Library of Munich, Germany.
  4. 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.
  5. Nordman, Christophe J. & Nguyen, Huu Chi & Roubaud, François, 2011. "Who Suffers the Penalty? A Panel Data Analysis of Earnings Gaps in Vietnam," Proceedings of the German Development Economics Conference, Berlin 2011 60, Verein für Socialpolitik, Research Committee Development Economics.
  6. Cho, Yoonyoung, 2011. "Informality and protection from health shocks : lessons from Yemen," Policy Research Working Paper Series 5746, The World Bank.
  7. Christophe Nordman & Faly Rakotomanana & François Roubaud, 2012. "Informal versus Formal: A Panel Data Analysis of Earnings Gaps in Madagascar," Working Papers DT/2012/12, DIAL (Développement, Institutions et Mondialisation).
  8. Araujo, Luis & Ponczek, Vladimir P., 2012. "Informal wages in an economy with active labor courts," Textos para discussão 294, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).

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