Earnings Inequality and Dynamics in the Presence of Informality: The Case of Brazil

Abstract

Using rich administrative and household survey data spanning 34 years from 1985 to 2018, we document a series of new facts on earnings inequality and dynamics in a developing country with a large informal sector: Brazil. Since the mid-1990s, both inequality and volatility of earnings have declined significantly in Brazil's formal sector. Higher-order moments of the distribution of earnings changes show cyclical movements in Brazil that are similar to those in developed countries like the US. Relative to the formal sector, the informal sector is associated with a significant earnings penalty and higher earnings volatility for identical workers. Earnings changes of workers who switch from formal to informal (from informal to formal) employment are relatively negative (positive) and large in magnitude, dispersed, negatively (positively) skewed, and less leptokurtic. Our results suggest that informal employment is an imperfect insurance mechanism.

Capital Account Liberalization and Wage Inequality: Evidence from Firm Level Data

“…The results show that the initially discussed impact of capital account liberalization on wage inequality is i) amplified in countries with a large informal sector (columns 1-3), and ii) mitigated in countries with a large share of employees covered by collective bargaining agreement (columns 4-6), in industries with high external finance dependence (columns 7-8) and with high export dependence (columns 9-11). These results are mostly consistent with previous findings showing that higher dispersion in wages exists among informal sector workers (Engbom et al, 2022), labor market institutions such as a strong collective bargaining coverage by restraining the bargaining power of firms reduce pass-through of firm level differences to wage, hence limiting the growth in wage inequality (Criscuolo et al, 2021), trade openness could reduce wage inequality through a distributional effect by concentrating workers at larger firms as less stable firms exit the market (Coşar et al, 2016) Furceri et al ( 2019) and may reflect the fact that ASEAN5 firms are financially constrained (see Li, 2020) as the liberalization of capital flows could then provide access to foreign capital.…”

“…Wage inequality is also driven by the existing labor market institutions within countries. More specifically, large informal sectors may amplify wage inequality (Engbom et al, 2022) while wider collective bargaining coverage and minimum wage requirements tend to limit growth in wage inequality (Criscuolo et al, 2021).…”

“…among informal workers (Engbom et al, 2022), that trade exposure matters (Coşar et al2016, Krishna et al, 2011, as well as labor market institutions that may limit pass-through of firm level differences to wage such as collective bargaining coverage (Criscuolo et al, 2021), we undertake further analyses. We show that the impact of capital account liberalization on between-firms inequality is mitigated in the case of countries with a large coverage of collective bargaining, in industries with large export orientation and external finance dependence.…”

“…We present results on wage dispersion as it is broadly used in the literature as a proxy for between-firm wage inequality (see for instanceAlvarez et al, 2018 andMoser, 2022). Results using the Gini index of wages showed a weaker explanatory power.©International Monetary Fund.…”

South to north investment linkages and decent work in Brazil

“…While some rightly argue that informality has some beneficial economic effects, x from a decent work perspective, informality is a serious problem because workers lacking a formal contract “work more, earn less, toil in unsafe conditions…, are in vulnerable positions in the labor market” which leads to a much higher likelihood of becoming “embroiled in illegal networks and/or police corruption [and having] worse living conditions” (Cardoso, 2016, p.22). Moreover, informal workers face significant volatility in employment and significantly lower wages (Engbom et al, 2022) while also lacking access to mandatory and voluntary benefits and experiencing relatively worse health outcomes (Neri, 2002).…”