Informal versus Formal: A Panel Data Analysis of Earnings Gaps in Madagascar

Abstract

In spite of its predominant economic weight in developing countries, little is known about informal sector income dynamics vis-à-vis the formal sector. Some works have been done in this field using household surveys, but they only consider some emerging Latin American countries (Argentina, Brazil, Colombia and Mexico;Gong et al., 2004;Perry et al., 2007; Bargain and Kwenda, 2011) and more recently South Africa, Ghana and Tanzania for Africa (Falco et al., 2010) and Vietnam for Asia (Nguyen et al., 2011). As a matter of consequence, there is still no way to generalize the (diverging) results to very poor part of the developing world. Taking advantage of the rich 1-2-3 Surveys dataset in Madagascar, in particular its four waves panel data (2000, 2001, 2003 and 2004), we assess the magnitude of various formal/informal sector earnings gaps while addressing heterogeneity issues at three different levels: the worker, the job (wage employment vs. selfemployment) and the earnings distribution. The questions asked are the following: Is there an informal sector job earnings penalty? Do some informal sector jobs provide pecuniary premiums? Which ones? Do possible gaps vary along the earnings distribution? Standard earnings equations are estimated at the mean and at various conditional quantiles of the earnings distribution. In particular, we estimate fixed effects quantile regressions to control for unobserved individual characteristics, focusing particularly on heterogeneity within both the formal and informal sector categories. Our results suggest that the informal sector earnings gap highly depends on the workers' job status and on their relative position in the earnings distribution. Penalties may in some cases turn into premiums. By comparing our results with studies in other developing countries, we draw conclusions highlighting the Madagascar's labour market specificity.JEL Classification: J21, J23, J24, J31, O17.

Public–Private Sector Wage Differentials in Australia

“…Furthermore, Nordman et al. () also focus on the earnings gaps between formal and informal sector workers, using panel data from Madagascar. Their study find a systematic premium at all points of the distribution of formal self‐employed workers over their informal counterparts, with comparatively larger premia at the lower end.…”

“…They find consistent results for all three countries, namely, that the wage penalty from being in the informal sector is larger in the lower part of the conditional distribution and tends to disappear at the top. Furthermore, Nordman et al (2016) also focus on the earnings gaps between formal and informal sector workers, using panel data from Madagascar. Their study find a systematic premium at all points of the distribution of formal self-employed workers over their informal counterparts, with comparatively larger premia at the lower end.…”

Public Versus Private Sector Wage Gap in Egypt: Evidence From Quantile Regression on Panel Data

“…A number of researchers followed this route in studying wage differential between formal versus informal sectors both at the mean and at various quantiles. They include, Tansel and Kan (2012) in Turkey, Nguyen et al (2013) in Vietnam, Bargain and Kwenda (2014) in Brazil, Mexico and South Africa, Tansel et al (2015) in Egypt and Nordman et al (2016) in Madagaskar. A common finding is that sectoral earnings differentials either get smaller or disappear in these countries when unobservable worker characteristics are controlled for with FE estimation exploiting the panel feature of the data.…”

Da Informalidade à Economia Popular: distinguindo realidades e conectando abordagens

“…In this view, markets cannot be properly explained only through the action of individuals who allocate scarce resources to alternative ends in order to maximize utility; structural and cultural factors should also be analyzed. The role of the entrepreneur is redefined as being an articulator of networks, with power to mobilize partners and connect productive and human resources (Granovetter, 2009;Martinelli, 2009). Thus, entrepreneurial action would not be guided by utilitarian calculation in the strict sense, but by cultural standards that take into account the preservation of bonds that guarantee the necessary balance to economic transactions.…”

“…One of its starting points has been the acknowledgment that many studies seek to understand why informal businesses do not evolve and join the formal economy, instead of questioning the failures and inadequacies of the latter. In addition, the problem is commonly seen as a matter of costs and benefits, evaluated on the basis of supposed utilitarian motivations (e.g., Nordman et al, 2016).Doing so, standard theories leave little room for the plurality of logics underlying the economy.…”