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

Olivier Bargain and Prudence Kwenda

No 201003, Working Papers from School of Economics, University College Dublin

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.

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 (search for similar items in EconPapers)
JEL-codes: J21 J23 J24 J31 O17 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-afr and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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http://hdl.handle.net/10197/2633 First version, 2010 (application/pdf)

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Working Paper: Is Informality Bad? Evidence from Brazil, Mexico and South Africa (2010)
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