Wage Inequality in Pakistan: How Does Contract Status Matter?

Abstract

In the past several decades, developing Asia has achieved outstanding growth rates in the globalization process. Unfortunately, this impressive growth in the emerging Asia seemly has not automatically brought about sufficient decent work for the expanding population. Particularly, temporary jobs are often claimed to be associated with lower remuneration and poor working conditions. Meanwhile, in developing Asia, where this problem is apparently acute, empirical research on this topic remains scarce. This paper attempts to fill this research gap by focusing on the interesting case of Pakistan. This research uses the Pakistani labor force survey 2008-2009. Only wage workers are kept for the analyses. The self-selection into wage workers and endogeneity associated with contract status are carefully considered. After doing different statistic tests, the control function method developed by Wooldridge (2015) appears to be the most relevant to investigate the wage differentials associated with contract status for Pakistani workers. The estimation shows that holding a fixed term written contract or no written contract instead of a long-term written contract could significantly reduce wages for Pakistani workers. However, the extent of wage inequality depends on how defining contract status. If we rely on the Pakistani national definition of fixed term contract, engaging in this job is likely to suffer the highest penalty in terms of hourly wage. Such a finding no longer holds once we refer to the international standard definition of fixed term contract. Besides, the wage gaps associated with contract status change if the monthly wage is the independent variable instead of hourly wage. These findings highlight the importance of a stable contractual arrangement and labor market regulation enforcement in tackling the wage penalty and assuring decent work for all in Pakistan. With a mega labor force and demographic dividend, Pakistan should prioritize job quality and equality to achieve inclusive and durable development and mitigate social instability. This study is a timely reply to the urgent demand for empirical evidence on contract-status-related wage differentials in Pakistan, serving as a reference for labor policymakers.