INFORMAL LABOR MARKETS AND ON‐THE‐JOB TRAINING: EVIDENCE FROM WAGE DATA

I. INTRODUCTION This study explores the role of informal jobs in the formation of human capital among young less-educated workers. An informal job is a job that fails to comply with some or all of the labor regulations. (1) The set of all informal jobs constitute what is typically known as the informal sector. Due to the lack of compliance with the labor laws, informal jobs are not registered with the authorities. (2) However, it is often argued that compliance with these laws is of great significance in developing countries to ensure social justice for workers (Berg and Kucera 2008) and to protect them against the forces of reallocation in the labor market (Inter-American Development Bank 2003). In spite of these arguments, the lack of compliance with these mandates in developing countries is common practice, leading to the existence of sizable informal labor markets, especially among the youth and the less educated. (3) Hence, the importance of understanding what role the informal sector is playing in the lives of young less-educated workers. The traditional views of the informal sector in the literature are that of a sector that is the last resort for many workers who are rationed out of the protected and better paid jobs in the formal sector (e.g., Ozorio de Almeida et al. 1995), or that it is the disadvantaged sector in a segmented labor market (e.g., Fields 1975; Harris and Todaro 1970). (4) The support for these views of the informal sector is mixed in the literature. The work of Maloney (1999), Amaral and Quintin (2006), and Galiani and Weinschelbaum (2012) suggests that the existence of informal labor markets is not necessarily evidence of segmentation and that could be an equilibrium outcome in a competitive labor market. However, the work of Arias and Khamis (2008) presents some evidence that is consistent with the rationing of formal-salaried jobs and with segmentation in the labor market. (5) Despite the ongoing debate, informal jobs play an important role in the work lives of less-educated workers. Maloney (1999) argues that informal-salaried jobs serve as the main point of entry for young poorly educated workers into paid employment. The current study further explores this idea focusing on the group of young less-educated workers in Mexico. The study explores the extent to which less-educated workers in the informal sector experience wage growth and how wage growth in the informal sector compares with wage growth in the formal sector. The basic question is whether informal jobs offer wage growth and skill accumulation to less-educated workers, and how it compares with formal jobs. The empirical analysis uses a household survey from Mexico, the ENOE (acronym in Spanish for Encuesta Nacional de Ocupacion y Empleo). The panel structure of the survey allows the construction of measures of wage growth and continuing sector participation. The results indicate that young less-educated workers in the informal sector experience faster wage growth than their peers in the formal sector. Based on existing models of on-the-job training (Acemoglu and Pischke 1999a, 1999b; Becker 1993; Stevens 1994), this result suggests that informal jobs offer valuable general training opportunities to young less-educated workers. The literature provides little evidence on wage growth in the informal sector or on how it compares with wage growth in the formal sector. There is some evidence on the wage gain (or loss) from informality. For example, Maloney (1999) and Alcaraz et al. (2011) provide estimates of the wage change associated with transitions between the formal and informal sectors in Mexico. The results in both studies indicate that informal-to-formal transitions are associated with positive wage changes, while transitions in the opposite direction are associated with negative wage changes. However, none of these two studies provide evidence on wage growth experienced by workers in the informal sector or how it compares to wage growth in the formal sector. …