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The aim of this paper is to examine the existence of skills differentiation between formal and informal labour markets. Learn more about. Peculiarities of the formal and informal economy The informal sector is an important part of the economy and certainly of the labour market in many countries. It also plays an important role in job creation, production and income generation. In low-income countries with high rates of population growth or urbanization, the informal sector tends to absorb most of the growing labour force in urban areas. Informal employment provides a necessary survival strategy in countries where there are no social safety nets such as unemployment insurance. In these situations, indicators such as the unemployment rate and time-related underemployment are not sufficient to fully describe the labour market. Statistics on informality are essential for assessing the quality of employment in an economy and are relevant for both developing and developed countries. Informal employment includes people who have carried out their main or secondary activities: the theoretical model implies that more productive enterprises tend to work formally and that the proportion of workers employed by formal enterprises is higher among more skilled workers. Empirical analysis reveals that formal firms are more productive than informal firms that control the characteristics of workers and that higher skills of workers increase the probability of a formal operation, as predicted by the theoretical model.

Polachek (2008) confirms the positive correlation between education and income based on data from the current 2003 Demographic Survey to assess reintegration rates for education in all occupational categories of the U.S. labor market. They note that “further education” has a positive effect on the weekly earnings of men and women in white-collar and blue-collar jobs. D is a dummy variable (formal and informal sectors) and SD is an interactive term (school years are multiplied by dummy variables). α4 measures the impact on interception (average) and α5 measures the effect on education performance (salary) If D = 0 (person in the informal sector) The harmonized series on informality are compiled by the Department of Statistics from the processing of microdata files from the national household survey using a consistent navigation path. The process consists of identifying the unit of production (formal sector, informal sector or household) and the type of work (formal employment or informal work) of each employee in his main occupation in order to deduce the final indicators. The informal-formal wage gap is examined by Bargain and Kwenda (2009) using large panels in Brazil, Mexico and South Africa. The study has two components. First, the usual wage standards are adjusted according to the taxes paid in the formal sector, which can lead to an overestimation of the wage premium in the same sector. Second, time-invariant unobserved heterogeneity is accounted for using quantile regression estimation with fixed results from Koenker (2004) and Canay (2011).

The sample includes only urban men aged 15 to 65 who are not educated, who work as unpaid families or as public sector employees. Women are excluded from the sample because most of them work in unpaid family work and the inclusion of labour market selection in quantile regressions is not yet the norm. The results show a similar pattern of distribution of informal wage sanctions across countries, as the resulting informal pay gap generally prevails in the lower pay quantiles and disappears at the top quantiles. Blunch (2011) complements the existing facts by examining the extent and determinants of the income gap between the formal and informal sectors in Serbia, even in the midst of the recent international financial crisis. The empirical analysis is carried out and referenced in four alternative measures of informality (company registration, employment contract, income from benefits and size of the enterprise) and over two periods of 2008 and 2009. In particular, Blunch first estimates the income gap in the gross formal and informal sectors through chopped wage regressions using ordinary least squares, and then applies the general and detailed breakdowns of Oaxaca blindly to the observed income gaps. The results show a large income gap between the formal and informal sectors, which seems to be narrowing in some way after the onset of the crisis. However, the deviation shows no noticeable change when checked for observable characteristics. An informal work situation means that the person doing the work has little or no job security, has no contract, and may not have the same employer for more than a few weeks or months. The Joseph Rowntree Foundation, a policy research organization, cites three main characteristics of informal work: low wages, few benefits, and limited hours.

An informal worker is often more of an entrepreneur than an employee, has no uniform or dress code, can be a seasonal or temporary worker, switches from one employer to another, has no taxes on their paychecks, and therefore works more often than desired. Formal and informal work also differs when it comes to taxes. Official employees are taxed under existing tax policies and receive paycheques that reflect these taxes. Informal employees are not taxed and are responsible for paying their own taxes. As a result, a country that relies primarily on informal work may not receive all taxes due under the law, as there may be millions of workers who choose not to declare their income and pay taxes on that income. Formal employment is recognized by workers who receive social security benefits from the employer, while informal employment concerns their absence. The organised sector consists mainly of regular workers, although on an informal basis workers include both regular and casual workers. The informal sector largely includes casual work (Papola and Kannan, 2016).

The pay gap between formal and informal forms is crucial to understanding informality in the labour market, particularly in developing countries with large informal sectors. It is generally accepted that the formal and informal sectors play a key role in the global economy. Wikipedia defines the formal sector as activities that are taxed and monitored by the government, and the activities involved are included in gross domestic product (GDP). Unlike the formal economy, there is the informal sector, which is neither taxed nor included in a country`s GDP and gross national product (GNP). .