Our comprehensive characterization of the weighted firm size distribution shows that not only is the average business size smaller in LDCs, but that the most outstanding contrast with AEs is an extreme skewness towards tiny productive units. While 70% of the workforce in AEs is engaged in firms of 10 or more employees, in LATAM, that fraction is only 32%. Roughly half of the (68%) remaining workers in the region are self-employed without employees, while the other half work at (or own) micro-businesses with fewer than 10 employees. Firm-level databases, even economic censuses, neglect a significant fraction of these two groups either as a deliberate design decision or due to the difficulties in identifying these businesses and recording their information. For instance, the Mexican Economic Census, the region’s most comprehensive dataset on businesses, arguably covering all private businesses outside agriculture, covers only 60% of workers in the private non-agricultural sector. Most of the omission has to do with workers in self-employment and in businesses with fewer than five workers (Busso et al., 2012). Much of the activity left out in LDCs is informal because own-account workers and micro-firms in these countries most frequently do not make social security contributions or register their businesses (three-quarters of this segment in our LATAM data).<sup>2</sup> Still, the omission occurs even in datasets that also intend to cover informal firms.

The data also show a tight correlation between individuals’ earnings and business size in LATAM. As an extreme manifestation of this close relationship, the share of individuals in LATAM’s bottom income decile working at firms of 10 or more employees is only 3%, while over 60% of individuals in that income decile are own-account workers without employees. Firm size and individual earnings are also correlated in AEs, which is consistent with models of firms that are heterogeneous in productivity and pay wages correlated with the marginal productivity of their workers, but the gradient is much weaker. The allocation of workers across size categories, rather than productivity (income) differences across them, explains 60% of the starker earnings gap of individuals in decile one versus the median in LATAM compared to the US.

These stylized facts have crucial implications. Our findings regarding individuals’ earnings imply that the bias in firm-level datasets against the self-employed without workers and microenterprises, tends to exclude low-income workers (including people in poverty). This omission implies a critical limitation for those interested in understanding inequality in LDCs and the causes of their income gap relative to advanced economies. Research not covering activity in the far left tail of the firm size distribution leaves out precisely the workers in the region for whom the income and productivity gaps relative to citizens of richer countries and the median worker in their own country are starkest. This calls for research integrating information on the universe of businesses in the economy, including self-employment initiatives without employees,

> 2 In fact, the ILO operational definition of the informal sector corresponds precisely to all productive units under the 10-employee threshold.

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