Abstract
This paper examines the earnings premiums associated with different types of employment in 73 countries. Workers are divided into four categories: non-professional own-account workers, employers and own-account professionals, informal wage employees, and formal wage employees. Approximately half of the workers in low-income countries are non-professional own-account workers and the majority of the rest are informal employees. Fewer than 10 percent are formal employees, and only 2 percent of workers in low-income countries are employers or own-account professionals. As per capita gross domestic product increases, there are large net shifts from non-professional own-account work into formal wage employment. Across all regions and income levels, non-professional own-account workers and informal wage employees face an earnings penalty compared with formal wage employees. But in low-income countries this earnings penalty is small, and non-professional own-account workers earn a positive premium relative to all wage employees. Earnings penalties for non-professional own-account workers tend to increase with gross domestic product and are largest for female workers in high-income countries. Men earn greater premiums than women for being employers or own-account professionals. These results are consistent with compensating wage differentials and firm quasi-rents playing important roles in explaining cross-country variation in earnings penalties, and raise questions about the extent to which the unskilled self-employed are rationed out of formal wage work in low-income countries.
Highlights
A defining characteristic of labor markets in developing countries is the high proportion of workers who are self-employed or work in the informal sector
This paper contributes to the ongoing discussion on self-employment, informality, labor market segmentation and earnings differentials
Earnings Penalties and Premiums for Self-Employment and Informal Employees around the World In Table 3 we report the results of the estimation of wage penalties (-) and premiums (+) for all self-employed workers vs. all employees, non-professional-own account workers vs. formal and informal employees, employers and professionals vs. formal and informal employees, and informal vs. formal employees
Summary
A defining characteristic of labor markets in developing countries is the high proportion of workers who are self-employed or work in the informal sector. This paper contributes to the ongoing discussion on self-employment, informality, labor market segmentation and earnings differentials. It uses data from 73 countries and multiple years from a comprehensive set of harmonized household surveys, the World Bank International Income Distribution Database (I2D2), to estimate the proportion and wage differentials of self-employed, informal, formal and salaried workers from around the world. The first contribution is to provide new comprehensive estimates of the proportion of workers who are non-professional own-account workers (interpreted broadly as a measure of unskilled self-employment), employers and own-account professionals (a measure of skilled self-employment), informal sector employees and formal sector employees. The estimated premiums/penalties for each country/year are from ordinary least squares estimates of wage equations and control for worker characteristics such as age, education, gender, as well as industry of work
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