Informal versus Formal: A Panel Data Analysis of Earnings Gaps in Madagascar

In spite of its predominant economic weight in developing countries, little is known about informal sector income dynamics vis-à-vis the formal sector. Some works have been done in this field using household surveys, but they only consider some emerging Latin American countries (Argentina, Brazil, Colombia and Mexico; Gong et al., 2004; Perry et al., 2007; Bargain and Kwenda, 2011) and more recently South Africa, Ghana and Tanzania for Africa (Falco et al., 2010) and Vietnam for Asia (Nguyen et al., 2011). As a matter of consequence, there is still no way to generalize the (diverging) results to very poor part of the developing world. Taking advantage of the rich 1-2-3 Surveys dataset in Madagascar, in particular its four waves panel data (2000, 2001, 2003 and 2004), we assess the magnitude of various formal/informal sector earnings gaps while addressing heterogeneity issues at three different levels: the worker, the job (wage employment vs. selfemployment) and the earnings distribution. The questions asked are the following: Is there an informal sector job earnings penalty? Do some informal sector jobs provide pecuniary premiums? Which ones? Do possible gaps vary along the earnings distribution? Standard earnings equations are estimated at the mean and at various conditional quantiles of the earnings distribution. In particular, we estimate fixed effects quantile regressions to control for unobserved individual characteristics, focusing particularly on heterogeneity within both the formal and informal sector categories. Our results suggest that the informal sector earnings gap highly depends on the workers' job status and on their relative position in the earnings distribution. Penalties may in some cases turn into premiums. By comparing our results with studies in other developing countries, we draw conclusions highlighting the Madagascar's labour market specificity.