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PurposeThe purpose of this paper is to examine the existence of skill differentiation between formal and informal labor markets.Design/methodology/approachFirst, 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.FindingsThe 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/valueThe paper provides an original theoretical model of skill differentiation in labor markets and empirically evaluates the implications of the model.

Urban growth controls (land use regulations that attempt to restrict population growth and urban sprawl) have increased housing prices and diverted population growth to uncontrolled cities. Resulting changes in labor supply should induce increased intercity commuting of workers from uncontrolled to controlled cities. This paper examines the effect of growth controls on jobs-housing mismatch (i.e., the mismatch between place of work and place of residency) using data from California cities. The econometric analysis indicates a positive and statistically significant effect.

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