# **I. Introduction**

A defining characteristic of labor markets in developing countries is the high proportion of workers who are self-employed or work in the informal sector. Despite a vast literature, there is still little consensus on the extent to which self-employed and informal sector workers are in those sectors because they are excluded from formal sector employment or because, based on pecuniary or non-pecuniary factors, they choose to be in those sectors. Earnings penalties for self-employment and informal employment are often interpreted as evidence of exclusion from higher-paid formal employment. Many studies have examined earnings differences between informal and formal employment and self-employment and wage employment for individual countries or for some regions of the world such as Latin America. However, there is very little comparative literature on how and why these earnings gaps differ across countries around the world.

This paper contributes to the ongoing discussion on self-employment, informality, labor market segmentation and earnings differentials. It uses data from 73 countries and multiple years from a comprehensive set of harmonized household surveys, the World Bank International Income Distribution Database (I2D2), to estimate the proportion and wage differentials of self-employed, informal, formal and salaried workers from around the world. The first contribution is to provide new comprehensive estimates of the proportion of workers who are non-professional own-account workers (interpreted broadly as a measure of unskilled self-employment), employers and own-account professionals (a measure of skilled self-employment), informal sector employees and formal sector employees. Our second major contribution is an estimate of the wage penalties or premiums for each of these groups in countries around the world. The estimated premiums/penalties for each country/year are from ordinary least squares estimates of wage equations and control for worker characteristics such as age, education, gender, as well as industry of work.

This study addresses the following eight questions: What proportion of workers fall into the following categories: non-professional own-account workers, employers and ownaccount professionals (which, for conciseness, we will also refer to as “employers and professionals”), informal employees and formal employees? How does the proportion of workers in each category change as countries develop? How does the proportion of workers in each category differ across countries and regions? Do workers appear to earn an earnings premium or pay an earnings penalty for self-employment and informal sector employment? Is there a difference between the self-employed who are employers and ownaccount professionals vs. non-professional own-account workers? How does the estimated self-employment earnings penalty or premium change as per capita GDP increases? How do estimates of this premium or penalty vary across countries and regions? How do these penalties or premiums differ between types of workers within countries?

We find that approximately half of the workers in low income countries are nonprofessional own-account workers. Fewer than 10% are formal employees, and only 2% of workers in low income countries are employers or professionals. As per capita GDP 2