Earnings Structures, Informal Employment, and Self-Employment: New Evidence from Brazil, Mexico, and South Africa

Abstract

We estimate the conditional earnings gap between formal and informal sectors, distinguishing between salary and self-employed workers. Rich panel datasets for Brazil, Mexico, and South Africa are assembled to define informality in a comparable way and to control for (time-invariant) unobserved heterogeneity. Estimations are conducted at different points of the conditional earnings distributions. Interesting results emerge. First, informal salary workers are systematically underpaid compared to their formal sector counterparts, in all countries and at almost all conditional quantiles. Yet penalties are very moderate in Brazil and Mexico while more substantial in South Africa, a country where legal advantages in formal employment are effective. Second, informal self-employment contributes to a more dispersed earnings distribution in all three countries. International comparisons reveal a continuum of situations reflecting historical and legal differences across countries, from very large self-employment penalties in South Africa to significant conditional earnings premia in Mexico.