Essays on informal labor markets

Abstract

The dissertation deals with the analysis of informality in developing countries considering both the worker’s and the firm’s perspective. Within a context of a strong presence of this phenomenon in the majority of South and Central America countries, the main goal of this research is to explore the factors that may influence the prevalence and the consequences of informality in this region. The analysis focuses in two dimensions of the informal labor market: the firms and the workforce, divided in three main topics. The initial point of analysis intends to provide evidence of the presence of informal firms and its differences between the South and Central America countries. Therefore, we evaluate which are the cross-national factors that account for the prevalence of informality and we try to identify the reason influencing the decision to run a business in the borderlines of the formal or informal sector in this region. It is worth mentioning that with these objectives in mind, this study is the first analysis using firm-level data covering a wide sample of South and Central America countries.

In this sense, we found three main results on firms’ informality. Firstly, it sheds light on the association between informality and the characteristics of firms. In this sense, small firms, less productive firms, older firms, one proprietor firms, less technological firms and manufacturing firms are more likely to operate informally. As second result, it reveals that entrepreneurs face obstacles in their operations, such as the presence of informal competitors, financial and tax administration obstacles, which positively influence informality. Thirdly, it analyses the effect of cross-country determinants of the likelihood of being informal firm. These factors are associated with the average GDP growth and the governance performance of the country. While the previous analysis addresses informality as a challenge issue to deal with in developing countries, the next two analyses focus their attention in Ecuador. The next tòpic explains the determinants of the job placement process in the Ecuadorian formal and informal labor market. In this regard, it seeks to answer weather being part of an informal job is a worker’s voluntary decision, or it is because there are restrictions on the number of job placements in the formal sector. In order to consider both workers’ preferences and employers’ hiring decisions, we apply a bivariate binomial probit model with partial observability since we can only observe the joint decision of both actors of the market. The study supports the presence of a restriction in the number of formal jobs in the economy and therefore existence of both, voluntary and involuntary informal employment. Nonetheless, these results lead directly to a next question, explicitly, how are the dynamics of the formal and informal sectors and which paterns affected the transitions within the labor sectors. Therefore, the next topic provides an overview of the dynamics of the formal and informal sectors and some specific patterns of the transitions within the labor sectors. We specify a transition matrix and a multinomial logit model to identify the movements across the sectors and the effect of each worker’s characteristics on the probability of moving to a given a sector. The transition matrix results suggest an important dynamics not only in and out of the labor market but also across the sectors; and as well that individuals are searching for job opportunities in both formal and informal sectors.