Is Informality Bad? Evidence from Brazil, Mexico and South Africa

29 Pages Posted: 1 Feb 2010

See all articles by Olivier Bargain

Olivier Bargain

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

Prudence Kwenda

University College Dublin (UCD)

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 fixed 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 significant earnings premium that may compensate the benefits obtained in formal jobs. In the lower end of the earnings distribution, both informal wage earners and independent (own account) workers face significant 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: quantile regression, earnings differential, informal sector, salary work, self-employed, fixed effects model

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

Suggested Citation

Bargain, Olivier and Kwenda, Prudence, Is Informality Bad? Evidence from Brazil, Mexico and South Africa. IZA Discussion Paper No. 4711. Available at SSRN: https://ssrn.com/abstract=1545138

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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