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

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  • Bargain, Olivier

    (University of Aix-Marseille II)

  • Magejo, Prudence

    (University of the Witwatersrand, Johannesburg)

Abstract

Most emerging economies are characterized by the presence of informal salary employment, often argued to be caused by stringent labor market regulation and to result in wage penalties compared to the formal sector. The actual picture is certainly more complex. In this paper, we use rich datasets for South Africa, Brazil and Mexico that allow us to define informality in a relatively comparable fashion across countries and to estimate precisely the (conditional) wage gap between informal and formal salary workers. We account for taxes paid in formal employment as well as for time-invariant unobserved heterogeneity, using large (unbalanced) panels and fixed effects quantile regression. Importantly, all three countries show a similar pattern once workers' heterogeneity is accounted for: informal sector wage penalties are significant in the lower part of the distribution but tend to disappear at the top. We provide an extensive robustness analysis and discuss the policy implications of these results.

Suggested Citation

  • Bargain, Olivier & Magejo, Prudence, 2009. "The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data," IZA Discussion Papers 4286, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4286
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    More about this item

    Keywords

    selection; fixed effects model; quantile regression; informal sector; wage gap; matching;
    All these keywords.

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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