Compensating wage differentials in formal and informal jobs

Dieter Verhaest and Stef Adriaenssens

Kyklos, 2022, vol. 75, issue 1, 106-126

Abstract: We link the dearth of empirical support for the theory of compensating wage differentials (CWD) to minimum wages and other labour market regulations. As these labour market regulations matter less for informal jobs, we hypothesise that CWD for adverse working conditions are more likely to be observed in these jobs relative to formal jobs. This is tested based on teenage employment data. The results are in line with our hypothesis. While informal jobs pay, on average, lower wages than formal jobs, a substantially higher premium for physically demanding and hazardous working conditions is found in informal jobs. This finding is robust against several sensitivity checks with respect to the identification method and measurement of the independent variables. Our results are also consistent with minimum wages being the key underlying mechanism for this difference in wage setting between formal and informal teenage jobs.

Date: 2022
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