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Formal Measures of the Informal Sector Wage Gap in Mexico, El Salvador, and Peru

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Author Info
Douglas Marcouiller, S.J. () (Boston College)
Veronica Ruiz de Castilla (University of Texas-Austin)
Christopher Woodruff (University of California-San Diego)

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Abstract

Using comparable micro-level data from three countries, we ask what type of person works in the informal sector and whether informal workers earn lower wages than observationally equivalent workers in the formal sector. The characteristics of informal workers are similar across countries. Surprisingly, when we control for these personal characteristics, we find a significant wage premium associated with formal employment in El Salvador and Peru but a premium associated with work in the informal sector in Mexico. A model of endogenous selection offers little help in explaining the differences in wage patterns. The research casts doubt on the received wisdom that the informal sector, always and everywhere, is a poorly-paid but easily- entered refuge for those who have no other employment opportunities.

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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 294..

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Length: 30 pages
Date of creation: Mar 1995
Date of revision:
Publication status: published, Economic Development and Cultural Change, 1997, 45, 367-392.
Handle: RePEc:boc:bocoec:294

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Related research
Keywords: Informal sector; wage differentials; Mexico; El Salvador; Peru;

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Find related papers by JEL classification:
O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. King, E.M., 1990. "Does Education Pay In The Labor Market?: The Labor Force Participation, Occupation, And Earnings Of Peruvian Women," Papers 67, World Bank - Living Standards Measurement.
  2. Magnac, Th, 1991. "Segmented or Competitive Labor Markets," Econometrica, Econometric Society, vol. 59(1), pages 165-87, January. [Downloadable!] (restricted)
  3. Funkhouser, E., 1994. "The Urban Informal Sector in Central America: Household Survey Evidence," University of California at Santa Barbara, Economics Working Paper Series 23-94, Department of Economics, UC Santa Barbara.
  4. Irwin Bernhardt, 1994. "Comparative Advantage in Self-Employment and Paid Work," Canadian Journal of Economics, Canadian Economics Association, vol. 27(2), pages 273-89, May. [Downloadable!] (restricted)
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    Other versions:
  6. Mazumdar, Dipak, 1983. "Segmented Labor Markets in LDCs," American Economic Review, American Economic Association, vol. 73(2), pages 254-59, May. [Downloadable!] (restricted)
  7. Moock, P. & Musgrove, P. & Stelcner, M., 1990. "Education And Earnings In Peru'S Informal Nonfarm Family Enterprises," Papers 64, World Bank - Living Standards Measurement.
  8. Telles, Edward E, 1993. "Urban Labor Market Segmentation and Income in Brazil," Economic Development and Cultural Change, University of Chicago Press, vol. 41(2), pages 231-49, January.
  9. Tokman, Victor E., 1989. "Policies for a heterogeneous informal sector in Latin America," World Development, Elsevier, vol. 17(7), pages 1067-1076, July. [Downloadable!] (restricted)
  10. Oaxaca, Ronald L. & Ransom, Michael R., 1994. "On discrimination and the decomposition of wage differentials," Journal of Econometrics, Elsevier, vol. 61(1), pages 5-21, March. [Downloadable!] (restricted)
  11. Marcouiller, Douglas & Young, Leslie, 1995. "The Black Hole of Graft: The Predatory State and the Informal Economy," American Economic Review, American Economic Association, vol. 85(3), pages 630-46, June. [Downloadable!] (restricted)
  12. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June. [Downloadable!] (restricted)
  13. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October. [Downloadable!] (restricted)
    Other versions:
  14. Gindling, T H, 1991. "Labor Market Segmentation and the Determination of Wages in the Public, Private-Formal, and Informal Sectors in San Jose, Costa Rica," Economic Development and Cultural Change, University of Chicago Press, vol. 39(3), pages 584-605, April.
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alberto Chong & José Galdo & Jaime Saavedra-Chanduví, 2007. "Informality and Productivity in the Labor Market: Peru 1986 - 2001," RES Working Papers 4526, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Kazuhiro Yuki, 2005. "Sectoral Shift, Wealth Distribution, and Development," Development and Comp Systems 0509001, EconWPA. [Downloadable!]
    Other versions:
  3. Eliane Badaoui & Eric Strobl & Frank Walsh, 2007. "Is There An Informal Employment Wage Penalty? Evidence from South Africa," IZA Discussion Papers 3151, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Arias, Omar & Blom, Andreas & Bosch, Mariano & Cunningham, Wendy & Fiszbein, Ariel & Lopez Acevedo, Gladys & Maloney, William & Saavedra, Jaime & Sanchez-Paramo, Carolina & Santamaria, Mauricio & Siga, 2005. "Pending issues in protection, productivity growth, and poverty reduction," Policy Research Working Paper Series 3799, The World Bank. [Downloadable!]
  5. Alberto Chong & José Galdo & Jaime Saavedra-Chanduví, 2007. "Informalidad y Productividad en el Mercado Laboral: Perú 1986-2001 (Informality and Productivity in the Labor Market: Peru 1986 - 2001)," RES Working Papers 4527, Inter-American Development Bank, Research Department. [Downloadable!]
  6. Henley, Andrew & Arabsheibani, G. Reza & Carneiro, Francisco G., 2006. "On defining and measuring the informal sector," Policy Research Working Paper Series 3866, The World Bank. [Downloadable!]
    Other versions:
  7. Kaplan, David S. & Gonzalez, Gabriel Martinez & Robertson, Raymond, 2007. "Mexican employment dynamics : evidence from matched firm-worker data," Policy Research Working Paper Series 4433, The World Bank. [Downloadable!]
  8. Diego Winkelried, 2005. "Income Distribution and the Size of the Informal Sector," Development and Comp Systems 0512005, EconWPA. [Downloadable!]
  9. Cunningham, Wendy V. & Maloney, William F., 1998. "Heterogeneity among Mexico's micro-enterprises - an application of factor and cluster analysis," Policy Research Working Paper Series 1999, The World Bank. [Downloadable!]
    Other versions:
  10. Chung Tran & Juergen Jung, 2007. "The Extension of Social Security Coverage in Developing Countries," Caepr Working Papers 2007-026, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  11. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "Trade, Wages and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms," CEPR Discussion Papers 3877, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  12. Mathan Satchi & Jonathan Temple, 2006. "Growth and labour markets in developing countries," CEDI Discussion Paper Series 06-12, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
    Other versions:
  13. Maloney, William F., 1998. "Are labor markets in developing countries dualistic?," Policy Research Working Paper Series 1941, The World Bank. [Downloadable!]
  14. Laura Juarez, 2008. "Are Informal Workers Compensated for the Lack of Fringe Benefits? Free Health Care as an Instrument for Formality," Working Papers 0804, Centro de Investigacion Economica, ITAM. [Downloadable!]
  15. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Patricio Solis & Francesco C. Billari, 2002. "Structural change and occupational attainment in Monterrey, Mexico," MPIDR Working Papers WP-2002-038, Max Planck Institute for Demographic Research, Rostock, Germany. [Downloadable!]
  17. Maloney, William F., 1998. "The structure of labor markets in developing countries : time series evidence on competing views," Policy Research Working Paper Series 1940, The World Bank. [Downloadable!]
  18. De Hoyos, R.E., 2006. "Structural Modelling of Female Labour Participation and Occupation Decisions," Cambridge Working Papers in Economics 0611, Faculty of Economics, University of Cambridge. [Downloadable!]
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