The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data

28 Pages Posted: 21 Jul 2009

See all articles by Olivier Bargain

Olivier Bargain

IZA Institute of Labor Economics; University College Dublin (UCD)

Prudence Kwenda

University College Dublin (UCD)

Abstract

This paper provides new evidence on the wage gap between informal and formal salary workers in South Africa, Brazil and Mexico. We use rich datasets that allow us to define informality in a relatively comparable fashion across countries. We compute precise wage differentials by accounting for taxes paid in the formal sector. For each country, we analyze how the sector wage gap varies within groups, between groups and over time. To account for unobserved heterogeneity, we use large (unbalanced) panels to estimate fixed effects models at the mean and at different quantiles of the wage distribution. We find that unobserved heterogeneity explains a large part of the (conditional) wage gap. The remaining informal sector wage penalty is large in the lower part of the distribution but almost disappears at the top. The penalty primarily concerns young workers and is found to be procyclical. We carefully investigate the robustness of these results and discuss their policy implications as well as regularities across countries.

Keywords: wage gap, informal sector, quantile regression, fixed effects model, selection

JEL Classification: J21, J23, J24, J31, C14, O17

Suggested Citation

Bargain, Olivier and Kwenda, Prudence, The Informal Sector Wage Gap: New Evidence Using Quantile Estimations on Panel Data. IZA Discussion Paper No. 4286, Available at SSRN: https://ssrn.com/abstract=1434620

Olivier Bargain (Contact Author)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland
+353 1 716 8357 (Phone)
+353 1 283 0068 (Fax)

HOME PAGE: http://www.ucd.ie/economics/staff/obargain/obargain.htm

Prudence Kwenda

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

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