Wage Gap Between Formal and Informal Regular Workers in India: Evidence from the National Sample Survey

Abstract

This article elucidates the wage differential between formal and informal workers across different sectors, gender, occupation, and industry by using the 61st (2004–2005) and 68th (2011–2012) Rounds of National Sample Survey Office (NSSO) unit-level data. The study emphasizes two things: first, identifying the existence of the absolute wage gap between formal and informal workers and, second, finding the intensity of discrimination in wage between formal and informal workers. The vast body of literature available on this issue identifies gender, caste, religion, and region as the factors causing wage discrimination. This literature makes a shift from these traditional concepts by explaining the importance of job contract as a basis of wage discrimination. This study utilizes the percentage relative gap (PGR) to work out the absolute wage gap between the two types of workers (formal and informal) and thereafter decomposes it to arrive at the source of the wage gap. The study applies the threefold Blinder–Oaxaca (B–O) decomposition method, which categorizes the total wage gap into three parts. The dependent variable chosen for the equation is the natural logarithm of daily wage. While the wage gap between formal and informal workers did not significantly fall during the study period, the results, on the other hand, indicate that the component of discrimination is larger than the component of endowment. This explains the discrimination perpetrated against informal workers in the Indian labor market. Tackling such discrimination necessitates implementation of more proactive policies for achieving wage equality in India.

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“…The 2017-2018 National Sample Survey (NSSO) reported that 52% of individuals were self-employed, largely in the informal sector, while 25% were employed in casual daily wage work and 23% were salaried [13]. As per the 2011-2012 NSSO, the national average daily wage rate for informal sector workers was INR 277, less than half of the daily wage rate of INR 716 in the formal sector [14]. In addition to this dependency on cheap informal labor, India also lacks social security programs that could buffer individuals from the adverse effects of financial hardship [15].…”

What Explains Caste-based Wage Inequalities and Earning Gaps in the Indian Labour Market? Theil and Oaxaca Decomposition Analysis

“…Unsurprisingly, they found that the incidence of food insecurity was higher among lower castes, though more of this differential was explained through differences in overall identity than caste. Kumar and Pandey (2021) explained factors contributing to significant discrimination caused by lack of formal employment in India using the Threefold Blinder Oaxaca decomposition method.…”

Impact of Labour Laws on Wage Differentials between Formal and Informal Sectors: Evidence from the Indian Manufacturing Sector

“…The trends in working age population growth and employment growth for men and women in rural and urban areas in the period between 2011-12 and 2017-18 show that the working age population grew by 115.5 million but the labour force grew only by 7.7 million and the workforce actually shrank by 11.3 million. This means there is a significant fall in the labour force participation rate 1 (LFPR) as well as workforce participation rate 2 (WPR), and a sharp rise in the unemployment rate [50].…”

“…Based on the data of ASI, Basole & Narayan [55] indicate a rising trend in the share of contract workers in India's organized manufacturing sector and this is despite labour laws prohibiting 1 Workforce Participation Rate (WPR): WPR is defined as the percentage of employed persons in the total working age population (individuals aged 15 years and above). It is usually considered a better indicator of conditions in the labour market compared to the Unemployment Rate (UR) as UR can also fall without an increase in employment due to individuals dropping out of the labour force.…”

“…The fore mentioned argument is often used as a case against labor laws. We, however, are of the opinion that need for labor laws arise from the need to regulate the employer-labor relationship by giving workers a basic minimum level of protection [1,2]. This is in recognition of the fact that labor has lower bargaining power as compared to the employer and in situations of conflict there is a need for the state to intervene.…”