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Is informality bad? Evidence from Brazil, Mexico and South Africa

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  • Olivier Bargain
  • Prudence Kwenda

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 fi?xed 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 signi?cant earnings premium that may compensate the bene?fits obtained in formal jobs. In the lower end of the earnings distribution, both informal wage earners and independent (own account) workers face signi?cant 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.

Suggested Citation

  • Olivier Bargain & Prudence Kwenda, 2010. "Is informality bad? Evidence from Brazil, Mexico and South Africa," Working Papers 201003, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:201003
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    File URL: http://hdl.handle.net/10197/2633
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    References listed on IDEAS

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    Cited by:

    1. Huu Chi Nguyen & Christophe J. Nordman & François Roubaud, 2013. "Who Suffers the Penalty?: A Panel Data Analysis of Earnings Gaps in Vietnam," Journal of Development Studies, Taylor & Francis Journals, vol. 49(12), pages 1694-1710, December.
    2. Aysit Tansel & Elif Oznur Acar, 2016. "The Formal/Informal Employment Earnings Gap: Evidence from Turkey," Research on Economic Inequality,in: Inequality after the 20th Century: Papers from the Sixth ECINEQ Meeting, volume 24, pages 121-154 Emerald Publishing Ltd.
    3. Araujo, Luis Fernando Oliveira de & Ponczek, Vladimir Pinheiro, 2012. "Informal wages in an economy with active labor courts," Textos para discussão 294, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    4. Nordman, Christophe J. & Rakotomanana, Faly & Roubaud, François, 2016. "Informal versus Formal: A Panel Data Analysis of Earnings Gaps in Madagascar," World Development, Elsevier, vol. 86(C), pages 1-17.
    5. Gustavo A. García, 2017. "Labor Informality: Choice or Sign of Segmentation? A Quantile Regression Approach at the Regional Level for Colombia," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 985-1017, November.
    6. Cho, Yoonyoung, 2011. "Informality and protection from health shocks : lessons from Yemen," Policy Research Working Paper Series 5746, The World Bank.
    7. repec:dau:papers:123456789/10601 is not listed on IDEAS
    8. 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.
    9. Michaelsen, Maren M. & Haisken-DeNew, John P., 2011. "Migration Magnet: The Role of Work Experience in Rural-Urban Wage Differentials in Mexico," Ruhr Economic Papers 263, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    10. 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.
    11. repec:zbw:rwirep:0263 is not listed on IDEAS

    More about this item

    Keywords

    Self-employed; Salary work; Informal sector; Earnings differential; Quantile regression; Fixed effects mode; Labor market--Brazil; Labor market--Mexico; Labor market--South Africa; Informal sector (Economics); Wage differentials;

    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
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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