find that self employment allows a better balancing of home and work responsibility. For some workers, informality offers more flexibility and mobility opportunities than the patronage-tenuredbased formal sector, for instance, Bolivian indigenous workers do not face earnings gaps with respect to non-indigenous in informal jobs contrary to the formal sector.<sup>9</sup> A sizable group of informal salaried workers would value at least partially the benefits that usually are tied with a formal labor contract, but they cannot afford these benefits due to their lower productivity and/or due to the fact that benefits are usually bundled with other undesired but costly programs. In this light, the equation of “decent work” to formal work is probably not helpful. The informal sector is very heterogeneous and maybe best approximated by an upward tier of largely voluntarily informal workers (including most selfemployed and some informal salaried) and a smaller lower tier for which the sector functions as a safety net. The relative size of these groups may vary across countries depending on overall productivity levels and labor institutions.

**_The relative size of the informal sector is, in the long run, related to demographic and productivity related factors rather than to distortions._** Crude regressions using pooled OECD/LAC data sets show that the relationship of the share of self employment and formal sector productivity is log linear and most of the variance is driven by demographic variables, suggesting the that decision to go into self employment is partly driven by the opportunity cost measured in terms of formal employment foregone.  Firing cost measures and social security taxes appears significant but of second order.<sup>10</sup> Wage gaps between workers in small and large firms in the region are similar to those in the U.S (IDB 2004).

**_In the short to medium term, sector size does reflect the macro economic situation and how much adjustment occurs through quantities v. real wages and the incentives of firms to become formal._** The large expansion of the sector in Colombia after 1995 occurred concomitant with a dramatic fall in earnings relative to the formal salaried sector, suggesting that substantial nominal rigidities were preventing the necessary adjustments to crisis.  Further, as Rama and MacIsaac (1999) point out, laid off workers from privatizations or other downsizing frequently wind up in informal self employment. On the other hand, in Mexico, the informal self employment sector expanded from 1988-1991 concomitant with a relative _rise_ in its earnings, suggesting a boom in the non-tradeables sectors that was particularly attractive to informal entrepreneurs. The overall sluggish wage growth in the informal sectors in many countries suggests that the sector has been hit hard by recessions. Furthermore, high compliance costs of regulations to start and run a business and low benefits tilt the cost-benefit ratio of informal entrepreneurs to remain informal. Costly procedures for registration and business expansion, negative tax incentives and the poor performance of public and private services (including the judiciary and credit access) yield low benefits to become formal. Hence, reforms should take an integrated view of how to change the incentives for both workers and firms to become formal.

**_Patterns of entry, exit and mortality in informal self employment are similar to those in the US._** Patterns of entry into self employment are observed later in mid-life, consistent with the existence of credit constraints-the sector is not a sector of entry. Evidence from Argentina, Brazil, Mexico, and Peru, suggest that young workers engage in informal salaried employment, generally for short periods of time, while self employment is most likely among middle aged workers.  Overall the “precariousness” arising from high rates of turnover of the sector may simply be due to high mortality rates found among small firms everywhere.

> 9 Tannuri, Pianto and Arias (2004).

> 10 Maloney (2001)

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