Cyclical wage premia in the informal labour market: Persistent and downwardly rigid

Using Colombian Household Survey (GEIH) data and Schmieder and von Wachter (2010) methodology, which builds upon Beaudry and DiNardo (1991) empirical approach, I found that informal workers obtain proportionally higher wage gains than formal workers when the labour market is tight. In turn, these wage premia are persistent in the informal sector, unlike the formal one. While these wage gains appear to increase around 20% the probability of layoffs when compared to the unconditional means across both sectors, the absolute increase for informal workers can be up to six-fold larger relative to their formal counterparts. The absence of regulation and employee benefits -such as written contracts, severance payments and social insurance-seems to have an amplifying effect on the informal workers’ bargaining power during the most favourable periods of the labour market.