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Skill differentiation between formal and informal employment

Skill differentiation between formal and informal employment Purpose – The purpose of this paper is to examine the existence of skill differentiation between formal and informal labor markets. Design/methodology/approach – First, a theoretical model is developed under the assumption that concealment of production is increasingly costly for informal firms. Second, using data on the Brazilian self‐employed economy, two methods are utilized to compare earnings in the formal versus the informal economy: propensity score and instrumental variable (IV) methods. For the IV estimations, state‐level variables are used as instruments for individual's decisions. In addition, the effect of schooling on formality choice is analyzed. Findings – The theoretical model implies that more productive firms tend to operate formally and the proportion of workers employed by formal firms is larger for higher skilled workers. In the empirical analysis, it is found that formal firms are more productive than informal firms, controlling for workers' characteristics, and that higher workers' skill increase the probability of formal operation, as predicted by the theoretical model. Originality/value – The paper provides an original theoretical model of skill differentiation in labor markets and empirically evaluates the implications of the model. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

Skill differentiation between formal and informal employment

Enlinson Mattos; Laudo M. Ogura
Journal of Economic Studies , Volume 36 (5): 20 – Sep 25, 2009
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References (34)

Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
0144-3585
DOI
10.1108/01443580910992384
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to examine the existence of skill differentiation between formal and informal labor markets. Design/methodology/approach – First, a theoretical model is developed under the assumption that concealment of production is increasingly costly for informal firms. Second, using data on the Brazilian self‐employed economy, two methods are utilized to compare earnings in the formal versus the informal economy: propensity score and instrumental variable (IV) methods. For the IV estimations, state‐level variables are used as instruments for individual's decisions. In addition, the effect of schooling on formality choice is analyzed. Findings – The theoretical model implies that more productive firms tend to operate formally and the proportion of workers employed by formal firms is larger for higher skilled workers. In the empirical analysis, it is found that formal firms are more productive than informal firms, controlling for workers' characteristics, and that higher workers' skill increase the probability of formal operation, as predicted by the theoretical model. Originality/value – The paper provides an original theoretical model of skill differentiation in labor markets and empirically evaluates the implications of the model.

Journal

Journal of Economic Studies – Emerald Publishing

Published: Sep 25, 2009

Keywords: Brazil; Labour market; Skills; Skilled workers; Developing countries

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