**_Nor are informal sector employees necessarily uncovered._** Evidence discussed below suggests that the minimum wage is, in fact, more binding in the informal salaried sector than the formal in many countries.  Further, in Peru, casual evidence suggests that informal sector workers are covered by vacation benefits and receive the holiday bonus salary.  Both lend support to the idea that much of the informal sector is not  necessarily inferior, but offers a package of characteristics that may dominate – in the cost benefit decision making process of workers and firms- that in the formal sector.  When we add the observation that the mean stay in the sector is very short, generally around a year in Argentina, Brazil and Mexico; that many informal salaried workers are working for relatives; and that substantial vocational and on the job training appears to occur in the sector, the classic view of a stagnant pool of rationed out and unprotected workers appears to be inadequate. As a first approximation, it may be better to consider it as largely an entry sector for poor and poorly educated workers that corresponds to the kinds of temporary jobs that youth in the industrial countries take as they shop for careers, although the earnings potential of many informal salaried is constrained by the low and stagnant productivity of small firms in the region.

# **_This discussion implies a substantial change in the labor market research agenda:_**

- **_Discussions of job quality must move away from dichotomies based purely on coverage by formal institutions._** A voluntary, unconstrained move into informality implies a superior job, even without benefits.  A more complete set of diagnostics of job quality need to be developed.

- **_A substantial share of “voluntary” informality suggests that the level of segmentation may be substantially less than previously imagined and the dualistic paradigm overstressed._** Arguing that 50% of the labor force is rationed out of formal employment at a demand elasticity of approximately 0.4 implies very high levels of wage rigidity. If, however, much or most is voluntary, the level of segmentation may be lower or nonexistent.  As discussed, Mexico has a large informal sector despite little evidence of either minimum wage or union induced nominal rigidities.

- **_Labor market policy, and social protection policy more generally, needs to be viewed in a more integrated framework to ensure incentives are correct across the entire labor market_** _._ Saavedra and Chong (1999) and Levenson and Maloney (1996) both argue that the decision to comply with regulations as a firm can be understood as the result of weighing the costs and benefits of participation in social institutions more generally.  The same calculus applies to workers who will weigh the value of social benefits relative to what arrangements can be made informally, against the tax, implicit or explicit, that being a registered employee implies.  As examples, training contributions in Colombia, for example, are 2 percent of payroll but are not valued by firms or workers; health care and social security systems are notoriously inefficient, at one point estimated at 25 percent of revenues in Mexico, and of poor quality; and pension funds are frequently insolvent and often have a strong redistributive dimension. Thus, reforms should focus on the most binding constraints and consider the interactions between labor regulations and other aspects of the investment climate affecting the incentives to become formal.

The implications for policy are critical. If most workers are rationed out of formal jobs, then expansion of social safety nets is welfare improving. However, in the alternative view offered, expanding inefficient or narrowly designed policies may backfire and 7