IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

Author Info

Listed author(s):
  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10197/2633
File Function: First version, 2010
Download Restriction: no

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

as
in new window

Length:
Date of creation: Jan 2010
Handle: RePEc:ucn:wpaper:201003
Contact details of provider: Postal:
UCD, Belfield, Dublin 4

Phone: +353-1-7067777
Fax: +353-1-283 0068
Web page: http://www.ucd.ie/economics

More information through EDIRC

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;

Other versions of this item:

Find related papers by 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

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Bosch, Mariano & Goni, Edwin & Maloney, William, 2007. "The determinants of rising informality in Brazil : Evidence from gross worker flows," Policy Research Working Paper Series 4375, The World Bank.
  2. Gong, Xiaodong & Van Soest, Arthur & Villagomez, Elizabeth, 2004. "Mobility in the Urban Labor Market: A Panel Data Analysis for Mexico," Economic Development and Cultural Change, University of Chicago Press, vol. 53(1), pages 1-36, October.
  3. Fields, Gary S., 2007. "Labor market policy in developing countries : a selective review of the literature and needs for the future," Policy Research Working Paper Series 4362, The World Bank.
  4. Arias, Omar & Khamis, Melanie, 2008. "Comparative Advantage, Segmentation and Informal Earnings: A Marginal Treatment Effects Approach," IZA Discussion Papers 3916, Institute for the Study of Labor (IZA).
  5. Günther, Isabel & Launov, Andrey, 2006. "Competitive and Segmented Informal Labor Markets," IZA Discussion Papers 2349, Institute for the Study of Labor (IZA).
  6. François Bourguignon & Francisco Ferreira & Phillippe Leite, 2008. "Beyond Oaxaca–Blinder: Accounting for differences in household income distributions," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 6(2), pages 117-148, June.
  7. Gong, Xiaodong & van Soest, Arthur, 2002. "Wage differentials and mobility in the urban labour market: a panel data analysis for Mexico," Labour Economics, Elsevier, vol. 9(4), pages 513-529, September.
  8. Eliane El Badaoui & Eric Strobl & Frank Walsh, 2008. "Is There an Informal Employment Wage Penalty? Evidence from South Africa," Economic Development and Cultural Change, University of Chicago Press, vol. 56, pages 683-710.
  9. Geeta Kingdon & John Knight, 2007. "Unemployment in South Africa, 1995--2003: Causes, Problems and Policies," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(5), pages 813-848, November.
  10. Bosch, Mariano & Maloney, William F., 2010. "Comparative analysis of labor market dynamics using Markov processes: An application to informality," Labour Economics, Elsevier, vol. 17(4), pages 621-631, August.
  11. Amuedo-Dorantes, Catalina, 2004. "Determinants and Poverty Implications of Informal Sector Work in Chile," Economic Development and Cultural Change, University of Chicago Press, vol. 52(2), pages 347-368, January.
  12. Henley, Andrew & Arabsheibani, Reza & Carneiro, Francisco G., 2006. "On Defining and Measuring the Informal Sector," IZA Discussion Papers 2473, Institute for the Study of Labor (IZA).
  13. Yamada, Gustavo, 1996. "Urban Informal Employment and Self-Employment in Developing Countries: Theory and Evidence," Economic Development and Cultural Change, University of Chicago Press, vol. 44(2), pages 289-314, January.
  14. Koenker, Roger, 2004. "Quantile regression for longitudinal data," Journal of Multivariate Analysis, Elsevier, vol. 91(1), pages 74-89, October.
  15. Sueli Moro & Flavia Chein & Ana Flávia Machado, 2003. "Self-employment in Brazil and its determinants: a spatial analysis," Textos para Discussão Cedeplar-UFMG td204, Cedeplar, Universidade Federal de Minas Gerais.
  16. Bosch, Mariano & Maloney, William F., 2008. "Cyclical Movements in Unemployment and Informality in Developing Countries," IZA Discussion Papers 3514, Institute for the Study of Labor (IZA).
  17. Dickens, William T & Lang, Kevin, 1985. "A Test of Dual Labor Market Theory," American Economic Review, American Economic Association, vol. 75(4), pages 792-805, September.
  18. Maloney, William F., 1998. "Are labor markets in developing countries dualistic?," Policy Research Working Paper Series 1941, The World Bank.
  19. Blunch, Niels-Hugo & Canagarajah, Sudharshan & Raju, Dhushyanth, 2001. "The informal sector revisited : a synthesis across space and time," Social Protection and Labor Policy and Technical Notes 23308, The World Bank.
  20. Marcouiller, Douglas & Ruiz de Castilla, Veronica & Woodruff, Christopher, 1997. "Formal Measures of the Informal-Sector Wage Gap in Mexico, El Salvador, and Peru," Economic Development and Cultural Change, University of Chicago Press, vol. 45(2), pages 367-392, January.
  21. Ricardo Paes de Barros & Carlos Henrique Corseuil, 2004. "The Impact of Regulations on Brazilian Labor Market Performance," NBER Chapters,in: Law and Employment: Lessons from Latin America and the Caribbean, pages 273-350 National Bureau of Economic Research, Inc.
  22. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
  23. Maloney, William F., 1998. "The structure of labor markets in developing countries : time series evidence on competing views," Policy Research Working Paper Series 1940, The World Bank.
  24. Funkhouser, Edward, 1997. "Mobility and Labor Market Segmentation: The Urban Labor Market in El Salvador," Economic Development and Cultural Change, University of Chicago Press, vol. 46(1), pages 123-153, October.
  25. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  26. Arias, Omar & Blom, Andreas & Bosch, Mariano & Cunningham, Wendy & Fiszbein, Ariel & Lopez Acevedo, Gladys & Maloney, William & Saavedra, Jaime & Sanchez-Paramo, Carolina & Santamaria, Mauricio & Siga, 2005. "Pending issues in protection, productivity growth, and poverty reduction," Policy Research Working Paper Series 3799, The World Bank.
  27. Cunningham, Wendy V & Maloney, William F, 2001. "Heterogeneity among Mexico's Microenterprises: An Application of Factor and Cluster Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 50(1), pages 131-156, October.
  28. Johannes P. Jütting & Jante Parlevliet & Theodora Xenogiani, 2008. "Informal Employment Re-loaded," OECD Development Centre Working Papers 266, OECD Publishing.
  29. James Albrecht & Aico van Vuuren & Susan Vroman, 2004. "Decomposing the Gender Wage Gap in the Netherlands with Sample Selection Adjustments," Tinbergen Institute Discussion Papers 04-123/3, Tinbergen Institute.
  30. Joshua Angrist & Victor Chernozhukov & Iván Fernández-Val, 2006. "Quantile Regression under Misspecification, with an Application to the U.S. Wage Structure," Econometrica, Econometric Society, vol. 74(2), pages 539-563, 03.
  31. Jaime Saavedra & Alberto Chong, 1999. "Structural reform, institutions and earnings: Evidence from the formal and informal sectors in urban Peru," Journal of Development Studies, Taylor & Francis Journals, vol. 35(4), pages 95-116.
  32. Gonzalez, Patricio Aroca*Maloney, William F., 1999. "Logit analysis in a rotating panel context and an application to self-employment decisions," Policy Research Working Paper Series 2069, The World Bank.
  33. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  34. Paul Cichello & Gary Fields & Murray Leibbrandt, 2003. "Earnings and Employment Dynamics for Africans in Post-apartheid South Africa: A Panel Study of KwaZulu-Natal," Working Papers 03077, University of Cape Town, Development Policy Research Unit.
  35. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as
in new window


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. Tansel, Aysit & Kan, Elif Oznur, 2012. "The Formal/Informal Employment Earnings Gap: Evidence from Turkey," IZA Discussion Papers 6556, Institute for the Study of Labor (IZA).
  3. Araújo, Luís & 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. Garcia, 2014. "Labor Informality: Choice or Sign of Segmentation? A Quantile Regression Approach at the Regional Lvel for Colombia," ARCHIVOS DE ECONOMÍA 011213, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  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

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:ucn:wpaper:201003. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicolas Clifton)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.