Compensating Differentials or Segmentation? An Analysis of Wage Differences in the Brazilian Labor Market Based on a Flexible Endogenous Switching Model Using Copulas
Informality; labour market; selection bias; segmentation; endogenous switching regression; copulas
This study examines the wage differential between formal and informal workers in Brazil and investigates whether this difference is due to selection bias or indicative of labor market segmentation. Using data from the 2022 Continuous National Household Sample Survey (PNAD Contínua), a flexible endogenous switching model with copulas is used to capture the selection bias separately for formal and informal sectors. Controlling for observed and unobserved factors, the Average Treatment Effect estimates show that informal workers in the public, private, and domestic sectors earn, on average, 24.1% more than formal workers, while informal self-employed workers and employers earn on average 14.2% more. These differences suggest that the decision to work informally may be based on economic preferences rather than being compelled to this sector. The results also underscore the importance of education in reducing informality, especially among employers and self-employed workers.