revised version published in: Economic Development and Cultural Change, 2015, 63 (1), 117-153
Most emerging economies are characterized by the presence of informal salary employment, often argued to be caused by stringent labor market regulation and to result in wage penalties compared to the formal sector. The actual picture is certainly more complex. In this paper, we use rich datasets for South Africa, Brazil and Mexico that allow us to define informality in a relatively comparable fashion across countries and to estimate precisely the (conditional) wage gap between informal and formal salary workers. We account for taxes paid in formal employment as well as for time-invariant unobserved heterogeneity, using large (unbalanced) panels and fixed effects quantile regression. Importantly, all three countries show a similar pattern once workers' heterogeneity is accounted for: informal sector wage penalties are significant in the lower part of the distribution but tend to disappear at the top. We provide an extensive robustness analysis and discuss the policy implications of these results.
We use cookies to provide you with an optimal website experience. This includes cookies that are necessary for the operation of the site as well as cookies that are only used for anonymous statistical purposes, for comfort settings or to display personalized content. You can decide for yourself which categories you want to allow. Please note that based on your settings, you may not be able to use all of the site's functions.
Cookie settings
These necessary cookies are required to activate the core functionality of the website. An opt-out from these technologies is not available.
In order to further improve our offer and our website, we collect anonymous data for statistics and analyses. With the help of these cookies we can, for example, determine the number of visitors and the effect of certain pages on our website and optimize our content.