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.

Transitions from the formal to the informal sector in Latin America

“…In Beccaria and Groisman (2015), similar results regarding gains in relative incomes are obtained when movements from informal sector jobs to formal sector jobs are analyzed. Similar results are reported by Engbom et al (2022) for Brazil which indicate that the earning changes of workers who switch from formal to informal (from informal to formal) employment are relatively negative (positive). However, not all evidence points to the existence of negative premia to informality.…”

Earnings Dynamics and Its Intergenerational Transmission: Evidence from Norway

“…The higher initial inequality for newer cohorts mirrors the change in overall earnings inequality. Guvenen et al (2018) and Engbom, Gonzaga, Moser, and Olivieri (2022) also document that initial inequality and overall inequality track each other very closely in the U.S. and Brazil, respectively. 10 The life-cycle profile of earnings inequality is roughly similar for all cohorts: For men between 25 and 35 years old, within-cohort inequality declines by around 70 log points and remains relatively stable afterward.…”

“…For example,Guvenen et al (2018) show that the initial income dispersion (above the median) is higher for younger cohorts in the U.S., as is the recent overall earnings inequality (above the median) Engbom et al (2022). document that when overall inequality was increasing inBrazil (1985Brazil ( -1995, income inequality over the life cycle was also increasing.…”

Global Trends in Income Inequality and Income Dynamics: New Insights from GRID

“…Blanco, Diaz de Astarloa, Drenik, Moser and Trupkin (2022) quantify nominal wage rigidity at times of low and high inflation in Argentina. Engbom, Gonzaga, Moser and Olivieri (2022) combine administrative and survey data to study the wage dynamics of workers switching between the formal and informal sectors in Brazil. Bowlus, Gouin-Bonenfant, Liu, Lochner and Park (2022) document the relationship between the earnings dynamics of workers and the size and growth of their employers in Canada.…”