Modelling Formal vs. Informal Employment and Earnings : Micro-Econometric Evidence for Brazil

Many developing economies, especially in Latin America, appear to be experiencing structural growth in the size of their informal sectors, inconsistent with traditional views that the informal sector acts as a buffer against unemployment, or is symptomatic of segmentation in the labour market. This paper presents micro-econometric evidence for Brazil that challenges this conventional wisdom by showing that the distribution of earnings in the informal sector extends well into the upper range of the full distribution. A model of informal sector choice is estimated using selectivity-corrected predicted earnings for each individual in both informal and formal sectors. The results of this show that a higher predicted earnings differential between the informal and formal sector is associated with a greater probability of a worker being employed in the informal sector. Other characteristics associated with informal sector choice are establishment size, payment method, union status and position within the household. We conclude that informal employment may be a desirable form of labour market status for many in Latin America, rather than a consequence of structural segmentation or cyclical displacement