Re-examining Wage Disparities Across Segments of the Indian Labor Market

Abstract

This article examines income disparities by considering both employer and employee perspectives of informality to scrutinize labor market segmentation in India. Additionally, the research investigates the impacts of varying degrees of urbanization, migration patterns, and industrial structures on formal and informal employment in the labor force. Utilizing data from the National Sample Survey Employment and Unemployment Survey rounds, specifically the 2004–2005 (61st) and 2011–2012 (68th) rounds, along with the Periodic Labour Force Survey 2018–2019 round, quantile regression models and the Recentred Influence Function decomposition method were employed to analyze wage inequality. A selection-corrected wage equation and its estimate were also presented by applying Bourguignon, Fournier, and Gurgand’s model-based selection correction. The study’s findings indicate that by 2019, the labor market had divided into two groups: organized formal workers and others. Further, the study reports wage convergence at lower quantiles and a widening gap at higher quantiles between organized formal and unorganized informal workers. Organized formal workers witness rising earnings, indicating positive wage growth, yet their share in overall employment remains small, which is significant given low job creation and high educated unemployment. At higher wage quantiles, there is a premium for being an informal worker in the organized sector compared to the unorganized sector, indicating a queue for formal employment opportunities in the organized sector. Despite the service sector’s significant role in Indian growth, it lags in creating formal job opportunities, unlike the manufacturing and construction sectors, which emphasize their substantial contribution to formal job generation. This study underlines that categorizing a firm as merely organized or a worker as formally employed is insufficient. Upgrades in these classifications should be accompanied by premiums, with wages being a key consideration. JEL Classification J31, J42, J62, J71