Formal Sector Wage Research Articles

The Impact of Privatization of State-Owned Enterprises on Workers

While privatization of state-owned enterprises (SOEs) remains a popular policy tool in many countries, the impacts on workers are unclear. This paper studies the case of Brazil, which implemented a large privatization program in the 1990s. Following privatization, incumbent workers in privatized SOEs suffer a wage decline of roughly 25 percent relative to a matched control group. Additionally, private sector firms that are connected to privatized SOEs by labor mobility also reduce wages. A summary calculation suggests that privatization decreased the formal sector wage by 3 percent, with about two-thirds of this effect due to the indirect impact on private sector workers. (JEL J31, J62, L32, L33, O14, O15)

Impact of Labour Laws on Wage Differentials between Formal and Informal Sectors: Evidence from the Indian Manufacturing Sector

Labor laws in India have been a subject of contention since their inception. There are arguments against labor laws that say that an adherence to labor laws push up the wages in the formal sector and reduce employability of the labor. A hike in labor cost makes capital relatively cheaper, causing an increase in capital intensivity of the production. This study is an attempt to show that labor laws are necessary and empirically proves that it is not the labor laws that create the wedges between the formal and informal sector wages. We econometrically test the hypothesis of there being a significant difference between wages in the formal and the informal sector and its correlation with existence of labor laws in the formal sector. The Oaxaca’s decomposition technique is used to find out the difference in formal-informal sector wages that could be attributed to existence of labor laws. The results that we obtain show that 87 percent of the difference in wages between the formal and the informal sector is determined by the differences in income generating characteristics of the worker employed. We conclude that labor laws do not drive up the wages artificially, they just make employment more secure and worthwhile for the worker. We also point out the importance of public investments in human capital creation, underlining the fact that it is these investments that can reduce various inequalities among the wages of workers across employments and sectors.

Reducción de la desigualdad de las remuneraciones e instituciones en Argentina (2002-2015)

La reducción de las brechas entre las remuneraciones de trabajadores con diferente nivel educativo es el principal factor que explica la baja de la desigualdad de los salarios privados en Argentina desde 2002. Este artículo analiza la influencia del salario mínimo y las negociaciones colectivas sobre la reducción de los premios a la educación entre los asalariados formales privados. Se resalta que ambas instituciones no pueden analizarse de manera separada y se muestran evidencias acerca de que en el periodo analizado no habrían influido sobre la disminución de las brechas salariales educativas.

Two Stories of Wage Dynamics in Latin America: Different Policies, Different Outcomes

This article explores the variation in the wage distributions of two Latin American countries, Bolivia and Colombia, which have had different political and economic strategies in recent years. Using data from household surveys, a decomposition of the wage distribution in each country using functional principal component analysis is conducted. The results suggest that Bolivia, which has implemented state-centered policies, has experienced a general increase in wages, especially benefiting the least skilled workers and the informal sector. On the other hand, the wage distribution in Colombia, whose economic policy has leaned towards market-oriented principles, has become more concentrated around the median wage, mainly due to changes in formal sector wages.

Self-employment in developing countries: A search-equilibrium approach

This paper develops and estimates a life-cycle on-the-job search model with self-employment that captures labor market stylized facts typical of middle-income developing economies. Workers flow across unemployment, self-employment, formal and informal wage employment. Individuals differ across and within employment sectors in terms of earnings, self-employment ability and transition rates. Counterfactual analysis shows that a flat reduction in payroll taxation increases the share of formal sector workers mainly due to a drop in self-employment. A proportional reduction in payroll taxes improves total welfare by increasing formal sector wages and profits, and allowing for a better allocation of high education workers. Converting to a progressive payroll tax system, equivalent to a flat reduction, is ineffective in reducing informality and leads to a decline in total welfare.

Immigration in Emerging Countries: A Macroeconomic Perspective

Roughly one third of migrants worldwide reside in developing countries, yet most papers on the macroeconomic effects of immigration focus on advanced economies. We investigate the medium- and long-term effects of immigration in an emerging country, considering a salient feature of this type of economies: the importance of labor informality. We build an overlapping generations model featuring 24 cohorts, an informal sector, and households with heterogeneous skill levels, among other features, that help us match key demographic and economic characteristics of Chile, an emerging country that has recently experienced an important immigration wave. An immigration wave increases the supply of labor, creating downward pressure on wages in the formal sector. Workers respond by reallocating labor effort to the informal sector, which allows them to mitigate the decline in consumption per worker triggered by lower formal-sector wages. Our model, thus, constitutes a framework for the quantitative analysis of immigration in emerging countries.

How do Regulated and Unregulated Labor Markets Respond to Shocks? Evidence from Immigrants During the Great Recession

We study wage adjustment during the recent crisis in Italy using a unique dataset on immigrant workers that includes those employed in formal and informal sector. We find that before the crisis immigrants’ wages in the formal and informal sectors moved in parallel (with a 15% premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32%. The difference was particularly salient for workers in occupations where the minimum wage is likely to be binding, and in “simple” occupations where there is high substitutability between immigrant and native workers. Calibrating a simple partial equilibrium model of spillovers between formal and informal markets, we find that less than 10% of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5–4.5%—much lower than 16% decline that we observe in the data.

Minimum Wage: Does it Improve Welfare in Thailand?

We study the causal impact of the minimum wage on labor market outcomes, household consumption, inequality and poverty in Thailand by relying on policy variation in minimum wages over time across provinces. We find that minimum‐wage increases have a large and significant impact on the likelihood of working in the uncovered sector among workers with elementary education. However, the impact is very small and insignificant among other labor market groups. In contrast, the minimum wage has large positive effects on the formal sector wages of low‐earning workers, such as the young, elderly and low educated. Increases in the minimum wage are associated with reductions in household poverty and consumption inequality at the bottom half of the distribution.

Job Satisfaction Among Young Workers in Eastern and Southern Africa: A Comparative Analysis

The creation of job opportunities for the increasingly educated youth population is a major current policy challenge in sub-Saharan Africa, even though very little is known about the extent to which young workers in the region are satisfied with the employment they currently have. This paper aims to help to fill this latter gap by presenting an analysis of job satisfaction of youth aged 15-29 in four countries from Eastern and Southern Africa: Madagascar, Malawi, Uganda and Zambia. We estimate ordered probit models of the degree of satisfaction in a respondent's main job, using data from the School-to-work Transition Survey (SWTS). It turns out that while a majority of workers are satisfied with their work, a large minority are not.We find that being over-educated or under-educated for the current job is strongly and negatively correlated with job satisfaction in all four countries. With respect to employment status, we find that those who report having chosen to be self-employed are substantially most satisfied in all four countries compared to formal sector wage employees, after controlling for many other factors. Formal wage employees are more satisfied than informal employees in only two of the four countries. These results reinforce the case made by Fields (2014) for not assuming that all self-employment is a 'last resort'. They also raise questions about the quality of available wage jobs for young people.

Income Inequality in Latin America: A Factor Component Analysis

The decline in inequality observed in most Latin American countries after 2002 was surprisingly good news, particularly given that most developed countries were experiencing a rise in inequality at that time. Various arguments have been put forward to explain this decline, but there is still no consensus on the most plausible explanation. This article contributes to the ongoing discussion by performing inequality decompositions by factor components. We estimate the importance of each source of income in explaining the observed decline in income inequality between 2002 and 2011 in five Latin American countries. Specifically, we explore the role of the process of formalization that has taken place in regional labor markets, separating formal and informal wages and considering self‐employment incomes. In the five countries studied here informal wages and self‐employment income contributed to decreasing inequality. Formal sector wages, on the other hand, fostered inequality in all countries except Bolivia.

How Do Regulated and Unregulated Labor Markets Respond to Shocks? Evidence from Immigrants During the Great Recession

We study wage adjustment during the recent crisis in regulated and unregulated labor markets in Italy. Using a unique dataset on immigrant workers, we show that before the crisis wages in the formal and informal sectors moved in parallel (with a 15 percent premium in the formal labor market). During the crisis, however, formal wages did not adjust down while wages in the unregulated informal labor market fell so that by 2013 the gap had grown to 32 percent. The difference was particularly salient for workers in occupations where there is high substitutability between immigrant and native workers. Calibrating a simple model of spillovers between formal and informal markets, we find that less than 10 percent of workers who lost a formal job during the crisis move to the informal sector. We also find that if the formal sector wages were fully flexible, the decline in formal employment would be in the range of 1.5-4.5 percent - much lower than 16 percent decline that we observe in the data.

The impact of minimum wages on informal and formal labor market outcomes: evidence from Indonesia

This paper studies the effects of minimum wages on informal and formal sector wages and employment in Indonesia between 1997 and 2007. Applying fixed-effects methods, the estimates suggest that minimum wages have a significant positive effect on formal sector wages, while there are no spillover effects on informal workers. Regarding employment, we find no statistically significant negative effects of minimum wages on the probability of being formally employed. These findings suggest that employers use adjustment channels other than employment or that effects such as a demand stimulus on a local level outweigh the possible negative employment effects. Jel codes: J08, J46

Are Street Vendors Really Innovative Toward Self-service Technology?

Street vending has acquired great importance in present times. This study attempts to link consumer innovativeness (CI) to street vending – an ancient occupation now emerging as a new market form using technology and innovation. The study investigates the behavior of street vendors (a group hypothesized to enjoy more innovativeness than those with similar socioeconomic backgrounds) regarding adoption of self-service technologies (SSTs) in the retail banking industry. In addition to primary research instruments, in-depth interviews were conducted with representatives of the two groups under study (street vendors and formal wage workers) to determine their awareness levels, usage, primary sources of information and reasons behind the adoption of the three SSTs considered along with their dependence on opinion leaders for making adoption decisions. Findings reveal that compared to formal wage workers, street vendors exhibit lower levels of innovativeness toward SSTs, and consumers are driven by three prime correlates of age, gender and income. Further, informal groups of street vendors earn higher income despite being less qualified technically or otherwise than the formal sector wage earners within their social class. These results will help practitioners revisit their existing marketing strategies and policies to increase the reach of self-service technology among urban lower middle class in India.

Trade Reform and Regional Dynamics: Evidence from 25 Years of Brazilian Matched Employer-Employee Data

We empirically study the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. We use variation in industry-specific tariff cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks, and then examine regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, we do not find that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, we find steadily growing effects of local shocks on regional formal sector wages and employment for 20 years. This finding can be rationalized in a simple equilibrium model with two complementary factors of production, labor and industry-specific factors such as capital, that adjust slowly and imperfectly to shocks. Next, we document rich margins of adjustment induced by the trade reform at the regional and individual level. Workers initially employed in harder hit regions face continuously deteriorating formal labor market outcomes relative to workers employed in less affected regions, and this gap persists even 20 years after the beginning of trade liberalization. Negative local trade shocks induce workers to shift out of the formal tradable sector and into the formal nontradable sector. Non-employment strongly increases in harder-hit regions in the medium run, but in the longer run, non-employed workers eventually find re-employment in the informal sector. Working age population does not react to these local shocks, but formal sector net migration does, consistent with the relative decline of the formal sector and growth of the informal sector in adversely affected regions.

Formal and Informal Sector Wage Differences in Transition Economies: Evidence from Tajikistan

Analyzing the self-selection of workers into formal and informal sector employment in Tajikistan, a poor transition economy, with higher informal sector than formal sector wages and an informal sector employment share exceeding 50 percent, we find that the selection of formal and informal sector workers is based on comparative advantages rather that labor market segmentation. Furthermore, labor supply to the two sectors reacts rather elastically to relative wages. Policies increasing relative wages in the formal sector could thus be effective in reducing the high informal sector employment share in this country.

Informality in developing economies: Regulation and fiscal policies

This paper proposes a unified theoretical framework where formal and informal firms coexist and face the same type of product and labor market imperfections: they have monopoly power in the goods market, they are subject to matching frictions in the labor market, and wages are determined by bargaining between large firms and their workers, through either individual or collective bargaining. Our model matches the main stylized facts on informality for developing countries and appears to be a good candidate for policy analysis. In this framework, we study the impact on informality, wages and unemployment of policies that may be used to reduce informality. We consider changes in product market regulation (PMR) and in two types of fiscal policies, labor taxes and formality enforcement. We find that lessening PMR decreases informality and unemployment simultaneously, indicating that there is not necessarily a tradeoff between informality and unemployment. The tradeoff appears when fiscal policies are used, though. Moreover, the impacts of PMR on unemployment and on wages are larger under collective than individual bargaining. With respect to wage inequality, lessening PMR reduces it, while lower taxes tend to increase the formal sector wage premium.

The Formal Sector Wage Premium and Firm Size for Self-Employed Workers

We develop a model where formal sector firms pay tax and informal ones do not, but informal firms risk incurring the penalty associated with non-compliance. Workers may enter self-employment or search for jobs as employees. Workers with higher managerial skills will run larger firms while workers with lower will manage smaller firms and will be in self-employment only when they cannot find a salary job. For these workers self-employment is a secondary/informal form of employment. The Burdett and Mortensen (1998) equilibrium search model turns out to be a special case that we amend by incorporating taxes and a penalty for non-payment of taxes. Our model is also consistent with some of the empirical literature in that the informal wage penalty does appear to be limited to low wage/skill workers while firm size is an important determinant of the employee formal sector premium. We test theoretical predictions using empirical evidence from Mexico and find that firm size wage effects for employees and self-employed workers are broadly consistent with the model.

SUBCONTRACTING, R&D AND LABOUR PRODUCTIVITY: A THEORETICAL EXPLANATION

While a large body of researches discusses the effects of international subcontracting on firm dynamics, the present work deals with the similar issues of a domestic firm who subcontracts to the informal sector in a typical developing world. Theoretically, we develop a model that if the formal sector wage is higher than that of informal sector, the choice of informal sector subcontracting and in-house R&D investment appears to be alternative options to the firm to bypass expensive labour in the formal sector. We argue that the R&D and labour productivity in formal sector are highly influenced by the informal wage but not the formal sector one. Since the subcontracting can raise both supply and demand for informal workers due to a rise of formal sector wage, the movement of informal sector wage is uncertain and thereby, the formal sector R&D and labour-productivity are also ambiguous. Thus, countries with a vast segment of lowly-paid informal workers exhibit lowly-productive formal workers.

Product Market Regulation, Firm Size, Unemployment and Informality in Developing Economies

This paper studies the impact of product and labor market regulations on informality and unemployment in a general framework where formal and informal firms are subject to the same externalities, differing only with respect to some parameter values. Both formal and informal firms have monopoly power in the goods market, they are subject to matching friction in the labor market, and wages are determined through bargaining between large firms and their workers. The informal sector is found to be endogenously more competitive than the formal one. We find that lower strictness of product or labor market regulations lead to a simultaneous reduction in informality and unemployment. The difference between these two policy options lies on their effect on wages. Lessening product market strictness increases wages in both sector but also increases the formal sector wage premium. The opposite is true for labor market regulation. Finally, we show that the so-called overhiring externality due to wage bargaining translates into a smaller relative size of the informal sector.

The Effects of Labour Market Policies in an Economy with an Informal Sector

In this article, we build an equilibrium search and matching model of an economy with an informal sector. Our model extends Mortensen and Pissarides (1994) by allowing for ex ante worker heterogeneity with respect to formal-sector productivity. We use the model to analyse the effects of labour market policy on informal-sector and formal-sector output, on the division of the workforce into unemployment, informal-sector employment and formal-sector employment, and on wages. Finally, we examine the distributional implications of labour market policy; specifically, we analyse how labour market policy affects the distributions of wages and productivities across formal-sector matches. In this article we construct a search and matching model that we use to analyse the effects of labour market policies in an economy with a significant informal sector. What we mean by an informal sector is a sector that is unregulated and hence not directly affected by labour market policies such as severance or payroll taxes. We find that labour market policies that apply only to the formal sector nonetheless affect the size and the composition of employment in the informal sector. This is important since there is substantial economic activity in the informal sector in many economies, particularly in developing countries. Estimates for some Latin American countries put the informal sector at more than 50% of the urban work force.1 The informal sector is also important in many transition countries as well as in some developed economies.2 Although much of the literature treats the informal sector as a disadvantaged sector in a segmented labour market framework, this interpretation is not consistent with recent empirical evidence from Latin America. Under a segmented or dual labour market interpretation, one would expect jobs to be rationed in the primary sector and workers to be in the secondary or informal sector involuntarily and to be queuing for formal-sector jobs. Maloney (2004) presents evidence for several Latin American countries that challenges this view and instead interprets the informal sector as an unregulated micro-entrepreneurial sector. Similarly, using data from the Argentinian household survey, Pratap and Quintin (2006) reject the notion that labour markets are segmented in the greater Buenos Aires area, concluding that there is no evidence of a formal-sector wage premium after controlling for individual and establishment * We thank Mauricio Santamaria for stimulating conversations that inspired our interest in this topic. We also thank Bob Hussey and Fabien Postel-Vinay as well as our editor, Steve Pischke, and two anonymous