The Informal Sector in Venezuela: Catalyst or Hindrance for Poverty Reduction

Abstract

In Venezuela, the informal sector has increased its participation in the labor market remarkably. Poverty levels of workers in the informal sector are higher than in the formal sector of the economy. Given the structure of the Venezuelan economy and the global trends, it is very unlikely that the formal sector will be able to absorb the labor force supply at a fast rate. This paper studies the relationship between poverty and informality in Venezuela through the determinants of labor earnings. Estimating an earnings model, that considers the probability of working in the informal sector, it was possible to determine the impact that education, experience, gender, geographic location and economic activities have on informal workers. The result of the estimation implies that male informal workers with more education and experience, urban, and dedicated to transportation, distribution, and mining, have significantly higher earnings per hour than other informal workers do. Results show that the informal sector remunerates experience at a higher rate than formal schooling. The informal sector also has broad gender gaps. Informal entrepreneurs receive earnings that double, on average, those received by informal self-employed workers and more than double those received by the informal employees. As a conclusion, a strategy directed towards the reduction of poverty should have two parallel aims. First, increase formal employment by policies heading towards economic growth and more flexible labor regulation. The second aim should be to increase productivity and wage levels in the informal sector. This paper finds evidence on the importance of education, experience, and capital access for informal earnings. Programs providing specific training for workers should have positive results on informal earnings. On the other hand, the significant differences between the employer and employee's wages can be related to the difficult access to capital, which is a scarce resource in the informal sector.