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Heterogeneity among Mexico's micro-enterprises - an application of factor and cluster analysis

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  • Cunningham, Wendy V.
  • Maloney, William F.

Abstract

A long tradition sees the small firm sector as a holding pattern for workers queuing for jobs in the formal sector of a segmented labor market. An alternative"entrepreneurial"view suggests that many workers prefer self-employment to salaried jobs. These competing views can be resolved if the sector is heterogeneous. Using factor and cluster analysis, the authors generate a typology of the sector by taking advantage of a Mexican data set on micro-firms that offers information on a broad range of small firm characteristics. The methodology permits divisions to emerge from the data without the a priori imposition of a theoretical structure. The data break into several distinct groups, broadly characterized as highly profitable and dynamic young firms, older firms that have stabilized at a small size, and young firms that act as an employer of last resort. Those in the last group, comprised of older entrepreneurs with low levels of education, are the most likely to cite that they started their firms because they were unable to find a salaried job. In general most of the firm owners in all groups stated that they chose self-employment over formal sector employment in order to be independent, collect higher earnings, or follow family tradition. These survey responses are supported by the finding that income distribution adjusted for human capital is composed of two sub-distributions, with the"underperforming"distribution comprising only 14 percent of the sample. The factor analysis also implies that firm owner characteristics and firm size or profitability may not be correlated. For example, young workers who we might think are forced into the small firm sector due to inability to enter the formal job market do not necessarily earn less or have less capital than older entrepreneurs. Furthermore, a distribution of the earnings residual factor shows that very few firms, regardless of the firm owner's age, are earning below their expected profits. The data suggest that the small size of informal firms may not necessarily result from limited access to financial institutions or a desire to evade labor or tax laws. Instead, the firms simply may be in the beginning stages of a growth process or owners may prefer to remain small.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1999.

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Date of creation: 31 Oct 1998
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Handle: RePEc:wbk:wbrwps:1999

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Keywords: Decentralization; Public Health Promotion; Banks&Banking Reform; Health Monitoring&Evaluation; Economic Theory&Research; Banks&Banking Reform; Health Monitoring&Evaluation; Economic Theory&Research; Environmental Economics&Policies; Small Scale Enterprise;

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  1. Douglas Marcouiller, S.J. & Veronica Ruiz de Castilla & Christopher Woodruff, 1995. "Formal Measures of the Informal Sector Wage Gap in Mexico, El Salvador, and Peru," Boston College Working Papers in Economics, Boston College Department of Economics 294., Boston College Department of Economics.
  2. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers, Pennsylvania State - Department of Economics 1-87-5, Pennsylvania State - Department of Economics.
  3. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
  4. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 519-35, June.
  5. Steven J. Davis & John Haltiwanger & Scott Schuh, 1993. "Small Business and Job Creation: Dissecting the Myth and Reassessing theFacts," NBER Working Papers 4492, National Bureau of Economic Research, Inc.
  6. Esfahani, Hadi S & Salehi-Isfahani, Djavad, 1989. "Effort Observability and Worker Productivity: Towards an Explanation of Economic Dualism," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(397), pages 818-36, September.
  7. Harman, Harry H., 1976. "Modern Factor Analysis," University of Chicago Press Economics Books, University of Chicago Press, edition 3, number 9780226316529, February.
  8. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, Econometric Society, vol. 50(3), pages 649-70, May.
  9. Levenson, Alec R. & Maloney, William F., 1998. "The informal sector, firm dynamics, and institutional participation," Policy Research Working Paper Series 1988, The World Bank.
  10. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, Elsevier, vol. 35(1), pages 33-47, January.
  11. Peattie, Lisa, 1987. "An idea in good currency and how it grew: The informal sector," World Development, Elsevier, Elsevier, vol. 15(7), pages 851-860, July.
  12. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 254-59, May.
  13. David Turnham & Deniz Eröcal, 1990. "Unemployment in Developing Countries: New Light on an Old Problem," OECD Development Centre Working Papers 22, OECD Publishing.
  14. Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 88(2), pages 194-227, May.
  15. Oster, Gerry, 1979. "A Factor Analytic Test of the Theory of the Dual Economy," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 33-39, February.
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