The role of the informal sector in the early careers of less-educated workers

Abstract

Does work experience gained in the informal sector affect the career prospects of less-educated workers? This paper examines two roles that informal sector jobs play in the early stages of a worker's career: informal jobs may (i) provide the opportunity to accumulate skills, and (ii) act as a screening device that enables employers to learn a worker's ability. The paper develops a matching model of the informal and formal sectors that can accommodate both roles. Implied hazard rates from informal to formal sectors as a function of tenure are shown to differ depending on the role of informal sector jobs: human capital accumulation or screening. Using the ENOE, a longitudinal employment survey from Mexico, hazard functions are estimated for less-educated workers. The estimated hazard functions indicate that informal sector jobs play an important role by screening young less-educated workers.