Essays on labor informality

Abstract

Labor informality is quite common in developing countries, to the point that in some countries it is so widespread that one could say the anomaly is formal employment. Given the extent of labor informality, and how it is not only linked to the labor market but also to the pension and tax systems, it is crucial to understand how it is generated and how it could be reduced in a way that improves society's situation.

However, it is important to consider that labor informality is not always negative, as it creates a buffer zone that protects workers with few years of education from unemployment. Then, the public policy problem is to find ways to reduce informality in the labor market without creating unemployment. The three chapters of this dissertation build on the above to discuss how to improve welfare in society in the context of labor markets characterized by informality.

Chapter 1 examines the evolution of labor informality in Chile with the idea of generating two contributions.

First, the country lacked a series of labor informality data before 2017, so I use multiple datasets to propose a method for estimating the labor informality rate between 1990 and 2020. A curious characteristic of this series is that it is surprisingly stable during a period when Chile greatly expanded tertiary education, which contradicts the idea that education is a good way to reduce labor informality. Then, I take a model developed to explain how the expansion of tertiary education helped reduce labor informality in Brazil and adapt it to the Chilean case. With this model, I am able to understand that the expansion of education did help Chile to reduce labor informality, but this positive effect was counteracted by the significant expansion of the minimum wage, and by the decline of the aggregate level of productivity in the country. Finally, I am also able to understand that the Brazilian and Chilean labor markets are different in the structures of their formal and informal parts, which also helps to explain why labor informality in Chile has been stable.

Chapter 2, a joint work with Roberto Cases, examines the specific situation of tertiary-educated workers in Chile. Here we can differentiate between two types: those with a college education and those with higher vocational education. Despite the increase in the proportion of workers with university education, not only do we not see a decrease in their salaries, but we also observe that they are occupying jobs intended for workers with higher vocational education.

To understand this, we develop a model that allows us to determine whether the market treats workers with a college education and higher vocational education as substitutes, i.e., they compete to do the same tasks, or complements, i.e., they help each other complete a task. Estimates from our model show that the market treats the two types of workers as substitutes, and given Chile's modular tertiary education structure, it makes sense for the market to prioritize workers with a college education over those with higher vocational education.

Finally, Chapter 3 studies how starting a career in the formal or informal sector can affect a worker’s labor outcomes, such as employment and wages. The idea behind this chapter is that the formal and informal sectors differ in their productivity, job safety, worker learning (i.e., human capital), and the number of job offers a worker could receive when employed in each sector. For this, I propose a model that incorporates all these aspects, and calibrate it using Chilean data. I found that workers employed in the formal sector receive higher earnings than those employed in the informal sector, and that the difference in present value is, on average, equivalent to 6.2 monthly minimum wages. I also found that formal employment leads to total earnings that are at least 7.8% higher after five years. Finally, I show that the most important components explaining the difference between the formal and the informal sector are productivity, worker learning, and the minimum wage.