The price of fringe benefits when formal and informal labor markets coexist

David Argente,Jorge Luis García

doi:10.1186/s40172-014-0014-0

Abstract

Abstract We use the Mexican labor market structure to price the set of fringe benefits that household heads receive when formally employed. We exploit longitudinal, nationally-representative information on household heads who are formal, informal, or switch status at least once in our data. Using monthly labor income and an efficient markets hypothesis, we identify a standard linear model which accounts for time-variant household heads’ characteristics and household level and time fixed effects. Under the usual strict-exogeneity assumption, we find that the price of fringe benefits is approximately 7.9% of the average monthly labor income of informal workers, or $217 USD. JEL Classification:D4; J3; J4

Highlights

Most developing countries are characterized by the presence of a large informal sector or large informal labor market
How do informal workers price forgone fringe benefits? In this paper, we argue that, in Mexico, informal workers are compensated for the value of lost benefits with higher labor income
We identify the price of these benefits through an approach that combines: i) the Mexican labor market structure, which had 58.3% informal workers in the period 2005–2013; ii) information on monthly labor income; iii) information on individuals who switched from formality to informality or the other way around; and iv) an efficient market hypothesis

Summary

Introduction

Most developing countries are characterized by the presence of a large informal sector or large informal labor market (see Figure 1). Workers in this sector usually do not pay taxes, have access to fringe benefits (i.e. social security and health care coverage), or fall under any labor market regulation. The existence of this sector and its recent expansion in many emerging economies has important implications for the functioning of labor markets and for economic growth. We identify the price of these benefits through an approach that combines: i) the Mexican labor market structure, which had 58.3% informal workers in the period 2005–2013; ii) information on monthly labor income; iii) information on individuals who switched from formality to informality or the other way around; and iv) an efficient market hypothesis

Results

Discussion

Conclusion