There is little evidence to support the traditional dualistic view of a labor market segmented between formal and informal sectors as the principal paradigm through which to view the informal sector. The division between good jobs and bad jobs seems to cut across issues of formality—and for many workers, inefficient labor codes and low levels of human capital may make employment in the informal sector more desirable.
There is a long tradition of viewing as disadvantaged the roughly 40 percent of workers in developing countries who areunprotected by labor legislation and work in small "informal" firms.
Maloney offers an alternative to traditional views of the relationship between formal and informal labor markets: For many workers, inefficiencies in present labor codes and relatively low levels of human capital (labor productivity) may make employment in the informal sector more desirable.
He offers the first study of worker transitions among sectors, using detailed panel data from Mexico, and finds little evidence to support the traditional dualistic view.
He shows that traditional earning differentials cannot prove or disprove segmentation in developing countries, and patterns of worker mobility do not suggest a rigid labor market—or one segmented into formal and informal divisions. It is possible that the market is dualistic in the sense used in the industrial world, but the division between good jobs and bad jobs seems to cut across issues of formality.
This paper—a product of the Poverty and Economic Management Unit, Latin America and the Caribbean Region- is part of a larger effort in the region to reexamine the role of the informal sector. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Marta Cervantes, room I8-095, telephone 202-473-7794, fax 202-522-0054, Internet address mcervantes@worldbank.org. The author may be contacted at wmaloney@worldbank.org. (34 pages)
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