with identical observable characteristics exhibit differential responses to common shocks, such as policy changes. A crucial feature of these types of models is that individuals differ in the amount of utility they derive from being in a particular job. Such differences may arise from differences in the preferences of the worker, or the characteristics of the job. Hence, exploring the latent heterogeneity of satisfaction within sectors is important for our understanding of labor markets.

This paper undertakes such an exploration by using recent advances in stochastic random parameter (mixed) discrete choice models to provide a more complete description of the distribution of subjective welfare across employment sectors. We do so in the developing country context where the role and implications of the extensive self-employed and small firm sector – broadly termed the informal sector – have been intensely debated for decades. While the advanced country literature stresses the desirability of independence and being one’s own boss that self-employment and the small firm sector offers, the developing country literature has tended to conclude from the attendant lack of social protection, and the association with poverty more generally, that such jobs are the inferior part of a highly segmented labor market.<sup>3</sup> However, demonstrating segmentation requires showing that, at the margin, utility is not equated across sectors and the conditional wage premia commonly estimated as proxies may instead reflect preference heterogeneity and compensating differentials (e.g. for risk, independence, taxes avoided, the perceived value of benefits, or training). Hence, as with the advanced country literature on self-employment, establishing the distribution of subjective measures of satisfaction offers more potential for characterizing the informal sector.

> 3Most evidence for segmentation relies on the observation that there is a sizeable formal sector wage premium; larger firms pay workers with otherwise similar observable characteristics more (see S ̈oderbom et al., 2006); and sorting is a key determinant of differences in labor income(Fafchamps et al., 2009). Yet evidence based on longitudinal data on labor market transitions from Latin America (see e.g. Maloney, 1999; Gong and Van Soest, 2002; Gong et al., 2004; Bosch and Maloney, 2006, 2010) suggests that characterizing self-employment as inferior to wage employment may be inappropriate since for many workers self-employment is a desirable alternative to formal sector employment, offering more flexibility and better pay. Although studies of this type are less prevalent in Africa, there are signs that African labor markets may not be highly segmented. To start with, average wages have been surprisingly responsive to unemployment rates (Kingdon et al., 2005). Secondly, while earnings vary systematically across sectors and are higher in formal wage employment, there is tremendous heterogeneity in returns within wage- and selfemployment (Falco et al., 2010); many of the self-employed earn more than comparable individuals in wage jobs. Moreover, Launov and Gunther (2012) test the dualistic labor market hypothesis by means of a mixture model that allows for endogenous segment selection using data from Cote d’Ivoire and reject it in favor of the Cunningham and Maloney (2001) and Fields (2005) views that argue that the informal sector has its own internal dualism.

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