Wage Difference Between Formal Sector and Informal Sector Jobs; With Special Reference to the Labour Market in Sri Lanka

Bharatha Prabath Parakrama Badullahewage,Shohani Upeksha Badullahewage

doi:10.18775/ijied.1849-7551-7020.2015.73.2001

Bharatha Prabath Parakrama Badullahewage, Shohani Upeksha Badullahewage

Open Access

https://doi.org/10.18775/ijied.1849-7551-7020.2015.73.2001

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Abstract

It is globally understood that wage-based employment structure and wages are a central aspects of the labour force at work. The informal sector is ranging to a broader concept that is difficult to define. The formal–informal wage gap is crucial to understand labour market informality, especially in developing countries with the large informal sectors. The basic model is taken from Mincer (1974), and the study is primarily based on secondary data. The new dummy variable of Job_type and an interactive term were incorporated into the Mincer earning function to analyse wage differences between formal sector and informal sector jobs. The study concludes that there is a wage gap between the a formal and informal sector. Moreover, if a person engages in formal sector job with good education qualification and good working experience, he will be entitled for a higher wage rate. Policies that promote education and equal opportunities for workers in both formal and informal sectors would improve earnings for many workers by increasing productivity and incomes.

Highlights

It is globally understood that wage-based employment structure and wages are a central aspects of the labour force at work
The new dummy variable of Job_type and an interactive term were incorporated into the Mincer earning function to analyse wage differences between formal sector and informal sector jobs
The findings reveal a similar distributional pattern of informal wage penalty across all countries, as resulting informal wage gap prevails mostly in lower earnings quantiles and disappears at the top quantiles

Summary

Introduction

It is globally understood that wage-based employment structure and wages are a central aspects of the labour force at work. The informal sector is ranging to a broader concept that is difficult to define. According to ILO, the poor working class and its activities includes the informal sector who are not recognized, recorded, secured, and regulated by public authorities. Maloney (2004) argues that the informal sector cannot be marginalised because it might be a voluntary choice for individuals or businesses due to various factors like aversion of tax, cost of regulations, having greater flexibility and more freedom. The organized sector consists of considerably regular workers on an informal basis, workers includes both regular and casual workers. The informal sector include largely casual employment (Papola & Kannan, 2016). It is widely accepted that both formal and informal sectors play a key role in the global economy

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