Urban Wage Premium in a Labor Market with Informality

SSRN Electronic Journal, 2001

Many developing economies, especially in Latin America, appear to be experiencing structural growth in the size of their informal sectors, inconsistent with traditional views that the informal sector acts as a buffer against unemployment, or is symptomatic of segmentation in the labour market. This paper presents micro-econometric evidence for Brazil that challenges this conventional wisdom by showing that the distribution of earnings in the informal sector extends well into the upper range of the full distribution. A model of informal sector choice is estimated using selectivity-corrected predicted earnings for each individual in both informal and formal sectors. The results of this show that a higher predicted earnings differential between the informal and formal sector is associated with a greater probability of a worker being employed in the informal sector. Other characteristics associated with informal sector choice are establishment size, payment method, union status and position within the household. We conclude that informal employment may be a desirable form of labour market status for many in Latin America, rather than a consequence of structural segmentation or cyclical displacement.

2015

O ccupational mobility and its impacts on urban Brazilian workers’ wages are analyzed in this paper. Data show high labor mobility in Brazil, especially among workers in the informal sector. The greater mobility of informal workers does not necessarily imply better wage trajectories and, further, workers’ mobility is restricted by labor market segmentation. Differences in upward job movements mean that informal labor receives low wages for longer periods over a working life, leading to important consequences for income differentials in Brazil.

Policy Research Working Papers, 2007

This article offers an alternative to the traditional dualistic view of the relationship between formal and informal labor markets. For many workers inefficiencies in formal sector protections and low levels of labor productivity may make informal sector employment a desirable alternative to formal sector employment. The analysis offers the first study of worker transitions between sectors using detailed panel data from Mexico and finds little evidence in favor of the dualistic view. Traditional earnings differentials cannot prove or disprove segmentation in the developing-country context. The patterns of worker mobility do not suggest a rigid labor market or one segmented along the formal/informal division.

Informal labour markets are a standard characteristic of labour markets in developing countries. It is often argued indeed that they are the engine of growth because their existence allows …rms to operate in an environment where wage and regulatory costs are lower. On the other hand informality means that the amount of insurance o¤ered to workers is lower. Thus the key question is how should one design policy on informality; what is the impact of a tighter regulatory framework on employment in the formal and the informal sector and on the distribution of wages. To answer this question we extend the framework of Burdett and Mortensen (1998) to allow for two sectors of employment. In our model …rms are heterogeneous and decide endogenously in which sector to locate. Workers engage in both o¤ the job and on the job search and decide which o¤ers to accept. This introduces direct transitions across sectors which matches the evidence in the data about job mobility. Our paper relates to Van den Berg (2003) and Bontemps, Robin and Van den Berg (2000) and also to other papers which consider two sectors such as Albrecht (2008) and Bosch (2006). Our empirical analysis uses Brazilian data and exploits information on compliance costs, which vary both over time and region. Finally, we use the model to discuss the relative merits of alternative policies towards informality.

SSRN Electronic Journal, 2022

Using a combination of rich administrative and household survey data, we document a series of new facts on earnings inequality and dynamics in a developing country with a large informal sector: Brazil. Since the mid-1990s, both inequality and volatility of earnings have declined significantly in Brazil's formal sector. Higher-order moments of the distribution of earnings innovations show similar cyclical movements in Brazil as in developed countries like the U.S. Earnings mobility is comparatively high, especially at the bottom of the distribution. Compared to the formal sector, earnings are more volatile in the informal sector. Workers who switch between sectors experience earnings innovations that have a positive mean and are positively skewed when moving to the formal sector but have a negative mean and are negatively skewed when moving to the informal sector. A secular shift of employment toward the less volatile formal sector since the early 2000s has contributed to a decline in the economy-wide volatility of earnings.

This paper estimates the association of informality, demographic, and educational changes with earnings of male workers in Brazil. Our analysis takes into account informality, demographic, educational, and economic regional variations over time, using Demographic Censuses microdata. Results suggest that informality, demographic, and educational transitions are correlated with earnings. Proportions of people in age-education-formality groups tend to have negative associations with aggregated earnings. Workers with secondary education completed experience negative effects on their earnings by having lower education than university graduates (education effect) and by representing a bigger share of the population than males with university education completed (cohort size effect). These effects depress earnings more in the formal than in the informal sector. These negative correlations have been increasing in magnitude over time.

2018

This article investigates the incidence of agglomeration externalities in a typical developing country, Ecuador. In particular, we analyze the role of the informal sector within these relations, since informal employment accounts for a significant part of total employment in the developing countries. Using individual level data and instrumental variable techniques, we investigate the impact of spatial externalities, in terms of population size and local specialization, on the wages of workers in Ecuadorian cities. The results show that spatial externalities matter also for a typical developing country, especially as far as urbanization externalities are concerned. Moreover, analysis of the interaction between spatial externalities and the informal economy shows a general penalization for informal workers in terms of benefits arising from agglomeration externalities. Finally, by investigating the possible channels behind the heterogeneity found in spatial agglomeration gains between ...

2020

The urban wage premium (UWP), is given by the positive wage differential in dense areas when compared to less dense regions and remains even after controlling the characteristics of individuals, occupations, and firms. Few studies identify the UWP between genders or, more specifically, that analyze the female UWP. Most studies focus on men, as they have a more stable behavior in the labor market. However, it is precise because there are different behaviors between genders that the inclusion of women becomes relevant. Such differences begin with the decision to participate in the labor market, which is influenced by factors and takes into account a coordination process, affecting men and women differently. The UWP investigation seeks to understand (i) whether the agglomeration economies in dense areas benefit men and women differently, and (ii) whether the allocation or composition of the labor market generates different magnitude for the UWP between genders. With this context, this ...

Brazil has a substantial share -about 60% by some measures -of its employees working without labor registry and 62% of its private sector workers not contributing to social security. Informality is important because its job precaurioness, social desprotection consequences, and it is also very correlated with poverty and other social welfare concepts measured at a family level. 58% of the country population that is found below the indigent line live in families headed by informal workers.