Uncovering the wage differential between formal and informal jobs: Analysis from the Colombian Caribbean region

Formal But Less Equal. Gender Wage Gaps in Formal and Informal Jobs in Brazil

BackgroundMental health is an important contributor to the global burden of disease, and depression is the most prevalent mental disorder in Latin America and the Caribbean (LAC). Informal jobs, often characterized by precarious working conditions, low wages, and limited employment benefits, are also highly prevalent in LAC and may be associated with poorer mental health. Our study tests the association between informal employment and major depressive symptoms in LAC cities. MethodsWe used individual-level data collected by the Development Bank of Latin America via their “Encuesta CAF” (ECAF) 2016, a cross-sectional household survey of 11 LAC cities (N = 5430). Depressive symptoms were measured using the 10-item Center for Epidemiologic Studies Short Depression Scale with possible total score ranging from 0 to 30. Scores were dichotomized, with a score >‾ 16 indicating the presence of major depressive symptoms. Informal employment was defined based on self-reported lack of contribution to the social security system. We used generalized estimating equation (GEE) log-binomial models to estimate the association between informal employment and depressive symptoms overall and by gender. Models were adjusted for age, education, and household characteristics. ResultsOverall, individuals employed in informal jobs had a 27% higher prevalence of major depressive symptoms (Prevalence Ratio [PR]: 1.27; 95% Confidence Interval [CI]: 1.00, 1.62) compared to those in formal jobs. The prevalence of depressive symptoms among individuals with informal jobs was higher compared to those with formal jobs in both women (PR: 1.36, 95% CI: 1.06, 1.74) and men (PR: 1.22; 95% CI: 0.90, 1.65). ConclusionsInformal employment in LAC was associated with a higher prevalence of major depressive symptoms. It is important to develop policies aiming at reducing informal jobs and increasing universal social protection for informal workers.

Formal but Less Equal. Gender Wage Gaps in Formal and Informal Jobs in Urban Brazil

State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector

Informal employment remains a prominent issue in developing countries, accounting for approximately 2 billion workers or 61 percent of the global workforce. It is widely assumed that informal employment is synonymous with “bad jobs” given its poor performance on a number of key indicators such as the absence of social protection and employment benefits as well as low average earnings. For these reasons, labor market policies have largely focused on reducing informal employment and facilitating transitions into formal jobs. Nevertheless, some scholars have argued against this perspective for a number of reasons. First, informal employment may be associated with certain benefits such as flexibility or autonomy. Moreover, as Fields (1990; 2005) argued, informal employment encompasses a wide range of jobs that vary across multiple dimensions. Heterogeneity in the quality of informal employment has important consequences for both research and policy. Ultimately, it raises the question of whether informality should be restrained altogether or allowed to expand. Despite the significance of Fields’ (1990; 2005) heterogeneous model, it was not until recently that empirical studies began to deviate from treating informal employment as a monolithic concept. Implicit in this traditional approach is the assumption that informal jobs exhibit uniform levels of quality. As a result, the nature and extent of heterogeneity within informal employment remains largely unexplored. This study aimed to contribute to these empirical gaps by examining whether, and to what extent, informal employment exhibits heterogeneity in terms of its quality. To achieve this, the study focused on three complementary indicators of job quality – i.e. earnings, working hours, and job satisfaction. These characteristics were examined in the context of Indonesia, a country that not only employs a large informal workforce but also exhibits significant diversity in terms of its resources, economic development, and its people. Compared to other countries, Indonesia also has some of the most stringent labor market policies particularly in terms of employment dismissal. Indeed, these policies were largely believed to have contributed to the segmentation between formal and informal workers.Aside from these unique features, the country is also the subject of a large multi-topic longitudinal survey known as the Indonesia Family Life Survey. By leveraging this data, I showedthat informal employment does exhibit heterogeneity insofar as earnings, working hours, and job satisfaction are concerned. The findings are consistent with Fields’ (1990; 2005) model of a heterogeneous informal sector comprised of an easy-entry, lower tier and an upper tier. Compared to formal workers who hold “good jobs”, informal jobs in the lower tier are characterized by poor quality as reflected by low earnings, non-standard working hours, and an overall dissatisfaction with one’s job. However, the opposite appears to hold for informal workers in the upper tier. Nevertheless, the results suggest that the upper-tier comprises a relatively small segment of Indonesia’s informal economy. Thus, for the vast majority of informal workers in Indonesia, the quality of employment remains low. The findings also indicate that both individual and employment characteristics play a significant role in predicting membership in either tier. In particular, gender, human capital, and employment status partly determine the type of job an individual has. Altogether, these results call for greater nuance in the design of policies aimed at improving the welfare of informal workers.

Firm-Size Wage Gaps Along the Formal-Informal Divide: Theory and Evidence

Observationally equivalent workers are paid higher wages in larger firms. This fact is often called the “firm‐size wage gap” and is regarded as a key empirical puzzle. Using microlevel data from Turkey, we document a new stylized fact: The firm‐size wage gap is more pronounced for informal (unregistered) jobs than for formal (registered) jobs. To explain this fact, we develop a two‐stage wage‐posting game with market imperfections and segmented markets, the solution to which produces wages as a function of firm size in a well‐defined subgame‐perfect equilibrium. The model proposes two explanations. First, taxes on formal employment generate a wedge between formal and informal size wage gaps. Thus, government policy can potentially affect the magnitude of the firm‐size wage gaps. The second explanation features a market‐based framework with strategic interactions. Relative to small firms, large firms typically post higher wages for both formal and informal jobs. A high‐wage formal job attracts a larger pool of applicants than a high‐wage informal job. The larger pool of applicants for the formal job, in turn, allows the firm to somewhat lower the initial wage offer, while this second‐round effect is negligible for informal jobs. As a result, size differentials are lower in formal jobs than informal jobs. We argue that the observed patterns in the use of social connections in job search and heterogeneity in job preferences can be used to justify the validity of this second mechanism.

Fall back or spring forward?: Labor market transitions and the informal economy in South Africa

We analyze mobility in urban Mexico between three labor market states: working in the formal sector, working in the informal sector, and not working. A dynamic multinomial logit panel data model with random effects is used, explaining the labor market state of each individual during each time period. The data are drawn from Mexico’s Urban Employment Survey, a quarterly household survey for urban Mexico. While some of the descriptive statistics suggest that informal sector jobs are inferior to formal sector jobs, formal tests cannot reject the null hypothesis of equal transition rates between formal and informal sector jobs for homogeneous groups of workers. Looking at entry and exit into and out of nonemployment, we find that transitions from formal sector jobs to nonemployment were less likely than transitions from informal sector jobs to nonemployment in 1992 but not in 1999, suggesting that employment protection in the formal sector has been reduced.

This paper examines the transition of workers between formal and informal jobs based on socio-demographic and employment characteristics. The study identifies factors that increase the likelihood of workers remaining in formal employment. The multinomial logistic regression model is incorporated to analyze labor transitions based on data from Indonesia's National Labor Force Survey (Sakernas) of 2017–2018. The findings show that 56.34% of workers were in informal activities and 30.58% were in formal jobs. Workers who transition from informal to formal jobs made up 6.84%, while 6.24% transitioned from formal to informal occupations. Informal workers were reluctant to move to the formal sector. Workers who are younger, unmarried, male, living in urban areas, and more educated are more likely to relocate from the informal to the formal sector. Work experience and participation in certified training can help shift workers to the formal sector, especially within the manufacturing industry.

In recent decades, economic reforms and technological advances have profoundly altered the way employers do business—for instance, the nature of employment relationships, the skills firms demand, and the goods and services they produce and export. In many developing economies, these changes took place concurrently with a substantive rise in work outside of the formal economy. According to International Labour Organization estimates, informal employment can be as high as 88% of total employment in India, almost 50% in Brazil, and around 35% of employment in South Africa. Such informal employment is typically associated with lower wages, lower productivity, poorer working conditions, weaker employment protections, and fewer job benefits and amenities, and these informal workers are often poorer and more vulnerable than their counterparts in the formalized economy. Informal jobs are a consequence of labor market policies—like severance payments or social security contributions—that make the noncompliant informal job cheaper for the employer than a compliant formal job. Each model has a different benefit (or lack of punishment) for employing formal workers, and a distinct mechanism through which international trade shocks alter the benefit-cost of these types of jobs, which in turn results in a change in the informality share. The empirical literature concerning international trade and formality largely points to an unambiguous increase in informal employment in the aftermath of increased import competition. Interestingly, increased access to foreign markets, via liberalization of major trading partners, offers strongly positive implications for formal employment opportunities, decreasing informality. Such effects are moderated by the de facto enforcement of labor regulations. Expansions toward the formal economy and away from informal wage employment in the aftermath of increased access to foreign markets are smaller in strictly enforced areas of the country.

In this paper the authors use a search and matching model of multi-sector labor markets, to understand the channels through which economic shocks affect labor market outcomes in developing countries. In the model workers can be employed in agriculture, formal or informal urban jobs, or unemployed. Economic shocks are manifested as either increased turbulence in the formal/informal sectors or a decrease in overall sectoral productivity. By calibrating the model to Indonesia and Mexico, the authors are able to understand how the 1998 Indonesian crisis and the 2001 Mexican recession translated into labor market outcomes. They then venture to simulate how the current financial crisis might affect the allocation of labor and earnings across sectors, in these countries. The results suggest that in both countries past crises have increased the degree of turbulence of the formal sector, increasing job destruction. However, while in Indonesia the crisis affected the overall formal sector productivity, this was not the case in Mexico. This explains the larger blow to formal wages -- relative to the size of the shock- witnessed by Indonesian workers. The response of the informal sector was also different: In both countries the informal sector was able to act as a buffer, as relative earnings increased. However, while in Mexico it became much harder to find informal sector opportunities and easier to keep the job once found; in Indonesia turbulence in the informal sector increased substantially increasing the job destruction rate of informal jobs and limiting the cushioning role that the informal sector might have played. The agricultural sector was spared from the shock in both countries. In Indonesia, it actually benefited from an unusual exogenous increase in the price of rise. The simulations show that if either the informal or agricultural sectors are spared from the shocks, large reallocations of labor might occur, and the overall effect of the shock is smaller. Instead, if these sectors can’t buffer the shock, the reallocation of labor is much smaller, but earnings in the formal sector drop substantially. The authors also explore the impact of alternative policies. They find that in relatively flexible markets where informality can be seen more as a choice rather than as queuing, unemployment benefits and informal employment subsidies may have paradoxical effects, by discouraging formal search. Instead, policies targeted at creating informal employment and boosting formal TFP growth have the desired effects.

Job Separations and Informality in the Russian Labor Market

In the years 2003–2008, the Russian economy experienced a period of strong and sustained growth, which was accompanied by large worker turnover and rising informality. We investigate whether the burden of informality falls disproportionately on job separators (displaced workers and quitters) in the Russian labor market in the form of informal employment and undeclared wages in formal jobs. We also pursue the issues whether displaced workers experience more involuntary informal employment than workers who quit and whether informal employment persists. We find a strong positive link between separations and informal employment as well as shares of undeclared wages in formal jobs. Our results also show that displacement entraps some of the workers in involuntary informal employment. Those who quit, in turn, experience voluntary informality for the most part, but there seems a minority of quitting workers who end up in involuntary informal jobs. This scenario does not fall on all separators but predominantly on those with low human capital. Finally, informal employment is indeed persistent since separating from an informal job considerably raises the probability to be informal in the subsequent job.

Did the types of jobs that men and women hold change during the recent period of economic reforms in Argentina, Brazil, and Costa Rica? Among both men and women in all three countries (except Brazilian men), workers have become more likely to hold informal wage jobs and less likely to hold formal sector jobs. The recent restructuring of Latin American economies has renewed interest in the effects of trade liberalization on labor markets and on the gender division of labor. Cunningham does not attempt to establish causality between economic reforms and the types of jobs that men and women hold. Instead, she provides a detailed description of the trends in male and female formal and informal sector participation during the economic reform period in Argentina, Brazil, and Costa Rica. Cunningham first compares the gender composition of the formal, informal wage, and self-employment sectors in a year before reforms (1988 for Argentina, 1989 for Brazil and Costa Rica) and a year after reforms (1997 for Argentina, 1995 for Brazil and Costa Rica). Although women continued to be more likely than men to work in the informal wage sector, there is no trend of masculinization or feminization of the informal sector or any other. Instead, in Argentina men have overtaken women as the most prevalent workers in the informal wage sector, while in Brazil the opposite has occurred (as men move into self-employment). In Costa Rica there have been no statistically observable changes. The author then considers the distribution across sectors within each gender group to identify whether men and women are more likely to select different sectors in the post-reform period relative to the pre-reform period. Among both men and women in all three countries (except Brazilian men), workers have become more likely to hold informal wage jobs and less likely to hold formal sector jobs. Trends in human capital accumulation explain these changes for both men and women, while changes in gender roles, primarily in homecare and marriage, do not seem to have an effect. This paper - a product of Gender Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to understand the role of gender in developing country labor markets. The author may be contacted at wcunningham@worldbank.org.