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

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

Salaires et emploi dans les secteurs public et privé. Différences et interactions

“…Dans toutes ces études (par exemple Disney et Gosling, 2003, pour le Royaume Uni, Dustmann et van Soest, 1998et Melly, 2005, pour l'Allemagne, Hartog et Oosterbeek, 1993, et van Ophem, 1993, pour les Pays-Bas, Bargain et Melly, 2008, pour la France et Lassibille, 1998, pour l'Espagne), une large part de ces différences viennent des effets de sélection entre secteurs, la composition des populations de travailleurs dans les deux secteurs présentant des différences en termes d'éducation, d'occupation et de genre.…”

Is There an Informal Employment Wage Penalty in Egypt?

“…Tannuri-Pianto and Pianto (2008) adopt QR technique corrected for selection using instrumental variables (IV) in a cross-sectional data set in Brazil. Nguyen et al (2013) in Vietnam and Bargain and Kwenda (2014) in Brazil, Mexico and South Africa adopt a fixed effect model estimation with QR technique (FEQR). Staneva and Arabsheibani (2014) use a QR decomposition technique taking into account self-selection of individuals into formal and informal employment types in Tajikistan.…”

“…Therefore, this procedure is used by Calderon-Madrid (1999) in Mexico, Pratap and Quintin (2006) in Argentina and Badaoui et al (2008) in South Africa in order to estimate the wage gap at the mean. Botelho and Ponczek (2011) and Bargain and Kwenda (2014) use PSW technique in combination with QR in order to provide estimates along the quantiles.…”

“…Pratap and Quintin (2006) and Badaoui et al (2006) used a combination of difference in differences and PSM approach at the mean. Botelho and Ponczek (2011) and Bargain and Kwenda (2014) extended this approach to quantile estimations by combining IPW and FEQR techniques as suggested by Firpo (2007). This procedure is in particular valuable because as shown by Smith and Todd (2005) it allows for selection on observable as well as selection on time-invariant unobservable characteristics.…”

“…For instance, Dohmen et al (2015) reported a fall in willingness to take risks during the Great Recession in Germany and Ukraine with consequences about labor market dynamics and outcomes. 3 This will render formal informal sector choice endogenous and the FE estimator inconsistent (Botelho and Ponczek, 2013, Nguyen et al, 2013and Bargain and Kwenda, 2014. In such case, wage penalty or premium associated with these transitions may differ.…”