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

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Title: Is informality bad? Evidence from Brazil, Mexico and South Africa
Authors: Bargain, OlivierKwenda, Prudence
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Date: Jan-2010
Online since: 2010-12-06T16:21:08Z
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.
Funding Details: Not applicable
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP 10 03
Keywords: Self-employedSalary workInformal sectorEarnings differentialQuantile regressionFixed effects mode
Subject LCSH: Labor market--Brazil
Labor market--Mexico
Labor market--South Africa
Informal sector (Economics)
Wage differentials
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Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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