Table 2: Variance Decomposition in Sector-Occupations (Sector-Occupation-Formal Status) and Skills

||Contributio<br>level|n of the comp<br> of wage inequ|onent to the<br>ality|Contribut<br>change in th<br>to the chan<br>ineq|ion of the<br>e component<br>ge in wage<br>uality|
|---|---|---|---|---|---|
||(1)<br>1995|(2)<br>2002|(3)<br>2015|(4)<br>1995-2002|(5)<br>2002-15|
|a. Decomp|osition: Sect|or-Occupation||||
|Total Variance|100 (0.584)|100 (0.604)|100 (0.450)|100 (0.020)|100 (-0.154)|
|Variance in sector-occupation|17 (0.103)|19 (0.114)|15 (0.067)|53 (0.010)|31 (-0.047)|
|Variance in skill-groups|15 (0.187)|11 (0.068)|10 (0.046)|-96 (0.019)|14 (-0.022)|
|2*Cov(sector-occupation, skill-groups)|10 (0.057)|9 (0.057)|9 (0.041)|0 (0.000)|10 (-0.016)|
|Residual|58 (0.338)|61 (0.366)|66 (0.296)|143 (0.028)|45 (-0.070)|
|b. Decomposition:|Sector-Occu|pation-Formal|Status|||
|Total Variance|-|100 (0.604)|100 (0.450)|-|100 (-0.154)|
|Variance in sector-occupation-formal status|-|25 (0.153)|22 (0.099)|-|35 (-0.054)|
|Variance in skill-gropus|-|10 (0.060)|8 (0.038)|-|15 (-0.022)|
|2*Cov(sector-occupation-formal status, skill-groups)|-|9 (0.055)|10 (0.042)|-|8 (-0.013)|
|Residual|-|56 (0.337)|55 (0.271)|-|42 (-0.065)|

_Source_ : Authors’ calculations based on data from the Socioeconomic Database for Latin America and the Caribbean, World Bank and Center for Distributive, Labor and Social Studies of the Universidad Nacional de La Plata (CEDLAS) (http://sedlac.econo.unlp.edu.ar/eng).

_Note:_ Table above is based on available information from Argentina, Bolivia, Brazil, Costa Rica, Mexico, Nicaragua, Peru and El Salvador. Total wage variance is the variance of the log hourly wage in the household surveys data set. Variance in skill-groups is the variance of the log real hourly wage that is explained by a full set of gender, education, and experience dummies, and their interaction. The variance in sector-occupation is the variance of the log real hourly wage that is explained by a full set of sector-occupation dummies. Similarly, the variance in sector-occupation-formal status is the variance of the log real hourly wage that is explained by a full set of sector-occupation-formal status dummies. Variable definitions are provided in supplementary online appendix S1. Cells contain the share of the total variance explained by each decomposition element (shown in percent). The total variance explained by each decomposition element is given in parentheses.

# **6. Wage Inequality among the Formal and Informal Workforce**

Historically, Latin America and other low- and middle-income regions have been characterized by high levels of informality (Perry et al. 2007). In 2015, 45 percent of total employment in Latin America was informal (figure 7, panel a).<sup>14</sup> However, the 2000s were a period of important growth in the number of formal jobs. Between 2002 and 2015, the share of formal employees in total employment increased from 47 to 55 percent. This resulted from a reduction in the share of self-employment, from 24 to 20 percent, and in the share of informal

> 14The first part of this section uses harmonized household survey data across countries in Latin America. Workers are formal employees in the household survey if they indicated that they have access to a pension through their job. This paper alludes to informal workers when it refers to two groups of workers: self-employed and wage workers without access to a pension (informal employees). The information to differentiate between formal and informal employees is only consistently available for a handful of countries during 1995-2002. Hence, the analysis in this section is carried out only for 2002-2015. The countries included in this section are Argentina, Bolivia, Brazil, Chile, Costa Rica, Mexico, Nicaragua, Peru, Paraguay and El Salvador.

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