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This paper provides new evidence on the impacts of the COVID-19 economic crisis on a labor market with a high prevalence of informality. The analysis uses a rich longitudinal household survey for Peru that contains a host of individual and job outcomes before and during the first months of the lockdown in 2020. The findings show that workers who had jobs in non-essential and informal sectors were significantly more likely to become unemployed. In contrast to developed countries, having a job amenable to working from home is not correlated with job loss when controlling for informal status. This is consistent with the high level of labor market segmentation observed in Peru, where high-skilled occupations are disproportionately concentrated in the formal sector, which was also better targeted by policies aimed at supporting firms and job protection during the crisis. In addition, the findings show that women were more likely to lose their jobs because female-dominated sectors are more intensive in face-to-face interactions and thereby more affected by social distancing measures. Increased childcare responsibilities also help explain the worse impacts on women in rural areas. Finally, workers who depended on public transportation before the crisis were more likely to lose their jobs during the early months of the pandemic.

This paper investigates the occupational mobility and job quality of young people in Indonesia and relates this to the concept of “scarring.” The concept of labor market scarring in this paper is the occurrence of low or zero returns to certain types of work (for example, self-employment). Scarring is expected to occur whenever an individual spends periods working in occupations in which their human capital is either stagnant or deteriorating. Fixed effects estimations using panel data from the Indonesian Family Life Survey reveal that a period in self-employment is associated with negative returns for youth (about 3 to 4 percent per year penalty), but not for older adults. In addition, there are clear patterns of persistence in self-employment over time with few individuals progressing from petty self-employment to businesses with permanent workers.

This paper analyzes recent trends in Sweden's labor market regulations in relation to comparator economies and examines the relationship between labor market regulations and outcomes. The paper finds that the Swedish labor market responded more rapidly to the recent global financial crisis than the majority of the European Union economies, which helped Sweden to recover quickly. Sweden's hiring regulations are more flexible than those of many comparator economies, however, fixed-term contracts of short duration might have adverse consequences for the economy. In addition, Sweden's regulations on work during the weekly holidays and mandatory paid annual leave are stricter than those of the majority of comparator economies. Moreover, among the economies of the Organisation for Economic Co-operation and Development, Sweden has one of the largest differences in employment protection between permanent and temporary employees, which could lead to a segmented labor market, where insiders enjoy high job security and outsiders are largely marginalized. This could be cause for concern, given that Sweden has a higher share of involuntary temporary workers among youth and involuntary part-time workers than both the Nordic and European Union averages. While protecting employees is important, excessive protection, particularly if it differs across different types of employment contracts, has been shown to have adverse effects on welfare and economic performance.

Tunisians are striving for the opportunity to realize their potential and aspirations in a country that is rich in both human and physical capital, but whose recent economic growth has failed to create enough opportunities in the form of good and productive jobs. This report highlights the main barriers that hinder the Tunisian labor market from providing income, protection, and prosperity to its citizens and proposes a set of labor policies that could facilitate the creation of better, more inclusive, and more productive jobs. The weak economic performance and insufficient and low-quality job creation in Tunisia is primarily the result of an economic environment permeated by distortions, barriers to competition, and excessive red tape, including in the labor market. This has resulted in the creation of a insufficient number of jobs, especially in the formal sector. To change this situation, policy makers need to address five strategic directives that can promote long-term inclusive growth and formality: foster competition; realign incentives, pay, and benefit packages in the public sector; move toward labor regulations that promote labor mobility and provide support to workers in periods of transition; enhance the productivity of informal workers through training and skills building; and reform existing social insurance systems and introduce new instruments to attain broader coverage.

Seguro Popular was introduced in 2002 to provide health insurance to the 50 million Mexicans without Social Security. This paper tests whether the program has had unintended consequences, distorting workers' incentives to operate in the informal sector. The analysis examines the impact of Seguro Popular on disaggregated labor market decisions, taking into account that program coverage depends not only on the individual's employment status, but also that of other household members. The identification strategy relies on the variation in Seguro Popular's rollout across municipalities and time, with the difference-in-difference estimation controlling for household fixed effects. The paper finds that Seguro Popular lowers formality by 0.4-0.7 percentage points, with adjustments largely occurring within a few years of the program's introduction. Rather than encouraging exit from the formal sector, Seguro Popular is associated with a 3.1 percentage point reduction (a 20 percent decline) in the inflow of workers into formality. Income effects are also apparent, with significantly decreased flows out of unemployment and lower labor force participation. The impact is larger for those with less education, in larger households, and with someone else in the household guaranteeing Social Security coverage. However, workers pay for part of these benefits with lower wages in the informal sector.

This paper quantifies the magnitude of transitions across occupational categories in Colombia, a country with high unemployment and informality but quickly increasing its social security coverage for health. The analysis makes use of a panel of households between 2008 and 2009, representative of the main metropolitan areas in the country. Results confirm previous evidence found in Colombia and elsewhere in the region that transitions between occupations are large and asymmetric: they are disproportionally more likely to happen from formal to informal occupations than vice versa. The paper finds for the first time that such transitions are also different for salaried workers compared with the self-employed, as well as by poverty status of the worker. Salaried workers are more likely to transition first into other salaried jobs, while self-employed are more likely to transition into unemployment or out of the labor force. There are marked differences in the profiles of transitioning and non-transitioning workers, both in terms of socioeconomic characteristics and social security coverage. Causal analysis shows that affiliation to social security on health deters occupational transitions, while pension insurance does not. Hence, high-volume transitions may not be crisis-specific phenomena, but rather associated with contributive and non-contributive social security mechanisms that incentivize informality, and workers' preferences for informal jobs. The debate on labor market and social security reforms needs to take these features of transitions into account.

Using panel data from labor force surveys in Argentina, Brazil, and Mexico, the paper maps out young people's paths from the classroom to the work place during the 1980s through the early 2000s. By decomposing transition matrices into propensity to move and rate of separation and estimating duration matrices, the authors follow young people's movements between school and work and between employment sectors to better understand the dynamics of youth employment, including where youth go upon leaving school, how long they spend in each state, and where they go upon leaving various employment states. The main conclusion of the study is that young people across all three countries follow a similar trend over their life cycle: they leave school to spend a short time in the informal sector, move to a formal position for longer spells, and finally become self-employed. The authors find evidence of decreasing segmentation between formal and informal sectors as workers age, a lower propensity for formal sector employees to return to school than workers in the same age cohort who are not in the formal sector, and that entry to self-employment is not subject to income constraints.

This paper focuses on the estimation of skill/industry premiums and labor force composition at the national and sector levels in seven East Asian countries with the objective of providing a comprehensive analysis of trends in demand for skills in the region. The paper addresses the following questions: Are there converging or diverging trends in the region regarding the evolution of skill premiums and labor force composition? Are changes in skill premiums generalized or industry-related? How have industry premiums evolved? The analysis uses labor and household surveys going back at least 10 years. The main trends emerging from the analysis are: (a) increasing proportions of skilled/educated workers over the long run across the region; (b) generally increasing demand for skills in the region; (c) the service sector has become the most important driver of demand for skills for all countries (except Thailand); (d) countries can be broadly categorized into three groups in relation to trends and patterns of demand for skills (Indonesia, Philippines, and Thailand; Vietnam and China; and Cambodia and Mongolia); and (e) industry premiums have increased in three countries of the region (Philippines, Thailand, and Cambodia). These trends point to several policyimplications, including that governments should focus on policies promoting access to education to address the increasing demand for skills and/or persistent skill shortages; support general rather than specific curricula given broad-based increases in skill premiums in most countries; better tailor curriculum design and content and pedagogical approaches to the needs of the service sector; and target some social protection programs to unskilled workers to protect them from the"unequalizing"impact of education.

The authors examine the factors affecting the transition to self-employment in Bosnia and Herzegovina, using the World Bank Living Standard Measurement Survey panel household survey for the years 2001-2004. In the beginning of the sample, the country changed its legal framework, with the primary aim to promote labor market flexibility and to encourage entrepreneurial activity. The analysis identifies individuals that switched to self-employment (employers and own account) during the sample period and the viability of this transition, in terms of business survival for more than one year. The results suggest an important role for financing constraints. Specifically, wealthier households are more likely to become entrepreneurs and survive in self-employment. After controlling for household wealth, having an existing bank relationship increases the likelihood of starting a business with hired employees and increases the chances of survival for the new entrepreneur. By contrast, overseas - and in some cases domestic - remittances decrease the likelihood of becoming an entrepreneur.

This paper identifies and estimates the strength of the reduction in poverty linked to improved opportunities for women in the expanding maquila sector. A simulation exercise shows that, at a given point in time, poverty in Honduras would have been 1.5 percentage points higher had the maquila sector not existed. Of this increase in poverty, 0.35 percentage points is attributable to the wage premium paid to maquila workers, 0.1 percentage points to the wage premium received by women in the maquila sector, and 1 percentage point to employment creation. Given that female maquila workers represent only 1.1 percent of the active population in Honduras, this contribution to poverty reduction is significant.

This paper presents a selective overview of the literature on modeling labor market policies in developing countries. It considers welfare economics, theoretical models, and empirical evidence to highlight the three general features needed in future research on labor market policy in developing countries. The author identifies desirable research components (welfare economics, theoretical modeling, and empirical modeling) and pitfalls in the literature (inappropriate use of productivity, reliance on wrong kinds of empirical studies, lack of cost-benefit analysis, attention to only a subset of the goods and bads, and fallacy of composition). The paper concludes with suggested topics and methods for future research. The author states that sound labor market policy requires sound labor market models. The paper makes a case for developing policy based on explicit evaluation criteria, specific theoretical models, and comprehensive empirical evidence.

There is one asset that poor people have in abundance: labor. Thus, what distinguishes the poor from the non-poor in low income countries is, simply, their ability to sell labor at a good price. It should be of little surprise, then, that enhancing the poor's access to employment is increasingly recognized as key to development. But while the creation of ""good"" jobs for the poor has become a policy priority for many developing countries, the mechanisms by which employment stimulates growth and reduces poverty have, until now, not been well understood.This book aims to help fill that gap. Focusing on labor market mobility as a central mechanism for both growth and poverty reduction, it brings together contributions originally presented at a conference organized by the World Bank's Poverty Reduction and Development Effectiveness department in June 2006. Using examples from all continents, these papers discuss why multi-segmented labor markets offer a good starting point for analysis, what role the informal sector plays in employment, whether self-employment is an engine of growth, how worker mobility affects income, and how firm dynamics affect both growth and employment through job creation and destruction.Addressed to policy makers and all who have a stake in growth and poverty reduction, ""Employment and Shared Growth"" aims to contribute to a better understanding of the important role of employment for economic development.

The World Bank Abstract: The degree to which a labor market is segmented and jobs in the formal sector of the economy are rationed is critical to the analysis of coverage of social insurance and pensions. In Chile, using unique panel data spanning the 1998-1999 contraction, I find little evidence that self-employment is the residual sector of a dualistic labor market, as is often depicted in the literature. Data on transitions between sectors show that self- employment is not a free-entry sector, and that entrepreneurs can be "pushed" out of self- employment just as others are pushed out of formal employment during economic downturns. However, employment without a contract does exhibit many of the features of the free-entry, employment safety net depicted in the dualistic literature. An annex to this paper, presents supportive evidence from static analysis of selection-corrected wage differentials, and a comment on the drawbacks of this approach.

An analysis of panel data on individuals in a random selection of urban households in Ethiopia reveals large, sustained, and unexplained earnings gaps between public and private, and formal and informal sectors over the period 1994-2004. The authors have no formal evidence whether these gaps reflect segmentation of the labor market along either of these divides. In other words, they cannot show whether they are at least in part due to impediments to entry in the higher wage sector. But they do have evidence that, if segmentation explains any part of the observed earnings gaps, then it could only have weakened over the survey decade. The authors find, first, that the rate of mobility increased between the two pairs of sectors. Sample transition rates grew across survey waves, while state dependence in sector choice decreased. Second, the sensitivity of sector choice to earnings gaps increased over the same period. In particular, the role of comparative earnings in selection into the informal sector was evident throughout the survey decade and increased in magnitude over the second half of the period.

Despite sustained output growth since 1997, low-income Commonwealth of Independent States (CIS) countries (CIS-7) have not experienced growth in employment, a phenomenon observed elsewhere in transitional economies and labeled as"jobless growth."The author addresses the causes of this phenomenon in the CIS-7. He argues that the lackof job creation is explained by a combination of structural factors, including capital-intensive growth, large potential for productivity gains among existing workers, and compartmentalized economies best depicted by a dual labor market framework. Agriculture and industry have performed asymmetrically and grown apart during the recession and during the growth periods. Agriculture provides subsistence and refuge from urban poverty and unemployment but is unable to grow beyond subsistence because it is disconnected from industrial manufacturing and because the agricultural infrastructure is depleted and underinvested. Industry has progressively lost its manufacturing capacity, and focuses on capital-intensive, highly productive sectors, and provides good wages for the few highly skilled workers. With governments and the international community currently refraining from investing in agricultural and industrial policies focused on reviving manufacturing, jobless growth is likely to persist.

The paper reviews labor market developments in the transition economies of Europe and Central Asia. It argues that the scarcity of productive job opportunities and the growing labor market segmentation are the two main labor market problems facing the transition economies. In the European transition economies the lack of jobs has led to persistent open unemployment. In the Commonwealth of Independent States (CIS) it has led to hidden unemployment (underemployment and low productivity employment). Unemployment in the European transition economies is supported by the developed social safety net. In contrast, in the CIS for most workers unemployment is not an affordable option. They either stick to their old, unproductive jobs in unrestructured enterprises, or work in the informal sector, or resort to subsistence agriculture. Thus, underemployment in the CIS is a mirror image of unemployment in the European transition economies. Accordingly, the high employment-to-population ratios in many CIS countries do not necessarily signify favorable labor market performance. Instead they often indicate delayed enterprise restructuring, the maintenance of unsustainable jobs in uncompetitive firms, and the existence of a large informal sector as an employer of last resort. Labor market segmentation has been caused by a sharp increase in earnings differentials and the attendant increase in the incidence of low-paid jobs, by the polarization of regional labor market conditions, and finally by the growth of the informal sector offering casual, low-productivity jobs. Labor market segmentation and accompanying inequalities are more pronounced in the CIS than in the European transition economies.

This paper studies the impact of labor market policies on growth and unemployment in labor-exporting countries in the Middle East and North Africa. The analysis is based on a framework that captures many of the main features of the labor market in these countries. We conduct a variety of policy experiments, including a reduction in payroll taxation, cuts in public sector wages and employment, an increase in employment subsidies, a reduction in trade unions' bargaining power, and a composite reform program. Our key message is that to foster broad-based growth and job creation in the region, labor market reforms must not be viewed in isolation but rather as a component of a comprehensive program of structural reforms.

The authors study the impact of labor market policies on unemployment in Morocco. They begin by reviewing the main features of the labor market. Then they present a quantitative framework that captures many of these features-such as a large public sector, high redundancy payments, powerful trade unions, and international labor migration. The authors simulate the impact of a cut in the minimum wage and a reduction in payroll taxation. The results indicate that these policies may have a significant impact in the short term on open unskilled unemployment. But they also show that labor market reforms, to be effective in the long run, may need to be accompanied by offsetting changes in the budget to avoid crowding-out effects on private investment.

The economies of Latin America have undergone extensive reforms, raising concerns about how these changes have affected the labor market. But there is also increasing concern that the reforms may have deeper social ramifications as the new economies strain the ability of certain groups of men to work and to earn good wages, fulfilling their traditional role as providers. Using household surveys broadly covering the period 1988-97 in urban areas of Argentina, Brazil, and Costa Rica, Arias examines the patterns of unemployment and real wage growth for distinct groups of male workers to see whether there is evidence of a deterioration in men's ability to be economically self-sufficient. He finds no general trend of male economic marginalization. The incidence and duration of unemployment have increased the most for the typically vulnerable group-young, less educated, informal sector workers-but the increased duration of unemployment has also affected older and more educated men. With respect to wages, density and quantile regression analysis indicates that the usual stories of wage marginalization of vulnerable workers can hardly explain the observed variety of wage growth patterns in the three countries. The positive wage performance has been concentrated mainly in the higher quantiles of the conditional wage distribution. This suggests that differences in unobservable worker characteristics, such as industriousness, labor market connections, and quality of schooling, have been key determinants of the ability of male workers in the region to adapt to economic restructuring. These results suggest that assistance should be targeted to some groups so that frustrations in asserting an economic identity do not lead to aggressive behavior. But they also show that we must look elsewhere for the roots of the increase in socially dysfunctional behavior.

Did the types of jobs that men and women hold change during the recent period of economic reforms in Argentina, Brazil, and Costa Rica? Among both men and women in all three countries (except Brazilian men), workers have become more likely to hold informal wage jobs and less likely to hold formal sector jobs. The recent restructuring of Latin American economies has renewed interest in the effects of trade liberalization on labor markets and on the gender division of labor. Cunningham does not attempt to establish causality between economic reforms and the types of jobs that men and women hold. Instead, she provides a detailed description of the trends in male and female formal and informal sector participation during the economic reform period in Argentina, Brazil, and Costa Rica. Cunningham first compares the gender composition of the formal, informal wage, and self-employment sectors in a year before reforms (1988 for Argentina, 1989 for Brazil and Costa Rica) and a year after reforms (1997 for Argentina, 1995 for Brazil and Costa Rica). Although women continued to be more likely than men to work in the informal wage sector, there is no trend of masculinization or feminization of the informal sector or any other. Instead, in Argentina men have overtaken women as the most prevalent workers in the informal wage sector, while in Brazil the opposite has occurred (as men move into self-employment). In Costa Rica there have been no statistically observable changes. The author then considers the distribution across sectors within each gender group to identify whether men and women are more likely to select different sectors in the post-reform period relative to the pre-reform period. Among both men and women in all three countries (except Brazilian men), workers have become more likely to hold informal wage jobs and less likely to hold formal sector jobs. Trends in human capital accumulation explain these changes for both men and women, while changes in gender roles, primarily in homecare and marriage, do not seem to have an effect. This paper - a product of Gender Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to understand the role of gender in developing country labor markets. The author may be contacted at wcunningham@worldbank.org.

The share of the workforce in self-employment and the level of turnover are shown to be unreliable measures of labor market distortion and rigidity. Both are shown to be more affected by standard economic and demographic variables - the level of formal sector productivity, real interest rates, and education levels - than by labor taxes and barriers to firing. Maloney uses cross-country data from Latin America and OECD countries to test the predictions of a simple efficiency wage model (Krebs and Maloney 1998) about the share of the workforce in self-employment and the rate of labor turnover across the process of development and demographic transition. The model is supported, with numerous demographic, economic, and labor market institutions appearing as important determinants of both self-employment and turnover. Social security taxes on firms and barriers to firing workers appear to reduce the size of the formal sector, and barriers to firing do appear to reduce turnover. But the level of formal sector productivity, real interest rates, and education levels generally have a greater impact. A central lesson is that it is misleading to use the size of the informal self-employed sector and the rate of labor turnover as indicators of distortion or rigidity without first adjusting for these factors. Somewhat speculatively, Maloney offers adjusted measures that suggest that Latin American labor markets are not especially distorted and are about average in flexibility, with important exceptions. Central to the theoretical framework is the view that self-employment is a desirable destination for many salaried workers rather than the disadvantaged sector of a labor market segmented by union- or government-induced rigidities. To prevent the loss of investment in training to the informal sector, firms will pay above-market-clearing efficiency wages, in the process creating unemployment or segmentation that may cut across lines of formality. This paper - a product of the Poverty Reduction and Economic Management Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to understand the functioning of developing country labor markets and the impact of labor legislation.

The authors use the 1994 Living Standards Measurement Survey to show that the impact of labor market regulations, namely mandated benefits, is mitigated by reducing the base earnings on which they are calculated. Therefore, market regulation neither accounts for labor market segmentation nor for slow growth and increased inequality alone. Ecuador's regulations do raise take-home pay, but less than the vast number of benefits would suggest. The increase in labor costs induced by compliance is even smaller than the corresponding increase in take-home pay, because mandated benefits are not subject to social security contributions or payroll taxes. Despite mandated benefits, wage differentials between industries are comparable to those in Bolivia, a country otherwise similar to Ecuador, yet known to have"flexible"labor markets. Compliance with these regulations is associated with significantly higher take-home pay only in the public sector and where trade unions are active -and it is unclear that merely changing the labor code would bring wages down in those two areas. The most dramatic earnings gap, the one between jobs in agriculture and the rest of the economy, appearsto be largely independent of either unions or labor laws. The authors conclude, therefore, that drastically streamlining the cumbersome labor laws, although welcome, would only produce moderate change.

Policymakers concerned about migration to high-income countries must take into account the political economy of the labor market. Labor market pathologies, like macroeconomic mismanagement, can be extremely costly - severely constraining growth of output and employment and increasing inequality. Domestic labor market outcomes influence the direction and magnitude of the flow of international migration. When wages are low and jobs are scarce, workers tend to migrate to environments where jobs are available at higher wages. But as labor demand grows, a labor-exporting country may become a net labor importer. Such a migration transition - already much in evidence in East and Southeast Asian countries and beginning for skilled workers in India - is analogous to the demographic transition. The process of political economy described by Banerji, Campos, and Sabot affects the level and growth of wages and of formal sector employment. So it is important for policymakers concerned about migration to high-income countries to take it into account. An efficient, flexible, responsive labor market contributes to growth by creating an appropriate economic environment. In this respect, labor policy is like macroeconomic and trade policy. Unlike the accumulation of physical and human capital and technical progress, a well-functioning labor market is not itself a source of economic growth. Yet labor market pathologies, like macroeconomic mismanagement, can be extremely costly, severely constraining growth of output and employment and increasing inequality. Similarly, failure to adequately address the labor-market aspects of policy reform can result in the failure of other dimensions of reform. The smooth functioning of the labor market feeds on itself, enhancing the credibility of both workers and the elite. Conversely, poor labor market performance can also be self-reinforcing. Attempts to reform the labor market are likely to be hampered by the lack of credibility of both labor and the elite. The payoff on labor reform can be high for both groups. The challenge is to find mechanisms whereby the credibility of both groups can be bolstered. This paper - a product of the Office of the Vice President, Development Economics - is a background paper for World Development Report 1995 on labor. Versions of the paper were presented at a World Bank seminar and to the 1994 Northeast Universities Development Conference at Yale University.

Large international organizations such as the World Bank pursue many objectives in hiring policies, including reduced costs, cultural diversity, and the avoidance of discrimination. There can be sharp tradeoffs between these objectives. Diversity is enhanced by recruiting from an international labor market, for example, but international organizations face unusually large differences in reservation wages for staff capable of doing the same work. One way to reduce costs would be to pay employees their reservation wages, which implies unequal pay for equal work, or discrimination. The authors show how these tradeoffs are resolved in the World Bank's hiring processes. They estimate disparities in salary and grades between men and women and by country of origin that cannot be attributed to differences in the productive characteristics of workers. The results indicate that about half the salary and grade differentials between men and women and staff from high- and low-income countries are attributable to differences in worker characteristics. They explore a number of alternative explanations for the rest of the salary and grade differentials, including omitted-variable bias, quotas imposed to ensure diversity, and discrimination in hiring and promoting. They argue that neither omitted-variable bias nor quotas are compelling explanations for disparities, and that discrimination probably exists, although certainly less than would be implied by a cost-minimizing hiring policy. A shift seems to be occurring in the hiring process of the Bank, possibly because 1) the application pool, including women and Part II nationals (from developing countries) has significantly improved in quality; 2) information gathering during hiring has intensified, decreasing guesswork; 3) there is more incentive to staff from minority groups; and 4) the Bank's increasing diversity in terms of gender and nationality groups is more conducive to high performance by the people against whom there may previously have been bias.

The high informality and mortality and apparent stagnation of developing country microfirms are often thought to result from government-induced distortions in labor or product markets. A new approach assumes that these informal firms have dynamics similar to firms in industrial countries, and that formality can be thought of as the decision to participate in societal institutions. This leads to a substantially different vision of the relationship between formality and the nature of the small firm that emphasizes the informal firm first as a normal enterprise and second as informal. The informal microfirm sector is believed to be large, accounting for 20-40 percent of employment in many developing countries. The literature tends to view the sector as the disadvantaged sector of a segmented labor market, as existing to evade government regulations, or as constrained by lack of access to government services. Levenson and Maloney offer a unique theoretical framework to analyze informality and microfirm growth behavior-one that emphasizes the entrepreneurial nature of informal firms and sees informality as a secondary characteristic. First, they assume that informal firms in developing countries have dynamics similar to firms in industrial countries: entrepreneurs have unobserved, differing cost structures that determine their long-run size and survival-structures that they can only discover by going into business. Second, informality can be thought of as a decision to participate in societal institutions. Access to mechanisms that ensure property rights, pool risk, or enforce contracts become more important as a firm grows, and the entrepreneur will be willing to pay for them through "taxes" in a way that was not the case as a small firm. The combination of these assumptions generates several of the stylized facts emerging from cross-sectional data and identified in existing models-informal firms tend to remain small and have high rates of mortality, and lower productivity-without recourse to government-induced distortions in labor or product markets. Further, the framework predicts that firms whose cost structures dictate that they should expand will make the transition to formality as they grow. Using detailed observations from Mexico, Levenson and Maloney find their view consistent with patterns of formality and growth of microfirms. This paper-a product of the Poverty Reduction and Economic Management Sector Unit, Latin America and the Caribbean Region-is part of a larger effort in the region to understand the structure of labor markets in developing countries. William Maloney may be contacted at wmaloney@worldbank.org.

In this study of Mexican firms, unions appear to bargain principally about employment rather than wages and firms appear to pay efficiency wages above market clearing to reduce turnover. Since minimum wages are not binding, whatever labor market segmentation is observed arises endogenously, and is not due to union- or government-induced distortions. Applying quantile analysis to detailed firm-level data from Mexico, Maloney and Ribeiro study determinants of demand and wages for two classes of labor. Unions appear to have a strong impact on how much unskilled labor is employed but not on wages. This suggests an extreme example of efficient bargaining rather than the more common monopoly union behavior. The impact on productivity is, by definition, negative, but unions could also be said to be forcing firms to use appropriate technology (less capital and more workers), increasing the total amount of labor employed in the economy. The only impact on wages appears for the tenth (lowest) quantile of unskilled workers, suggesting that unions prevent workers from being paid too far below the median for their skill level. Maloney and Ribeiro identify significant efficiency wage effects where firms pay above market clearing to prevent labor turnover both in labor demand and in the wage equations. Since minimum wages are not binding and the union impact on wages is small, this suggests that whatever segmentation exists emerges endogenously and is not due to union- or government-induced distortions. Maloney and Ribeiro offer the first use of quantile analysis to analyze labor demand at the firm level, and one of the first uses of correct standard errors in two-stage least-squares quantile regression. This paper - a product of the Poverty Reduction and Economic Management Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to understand the functioning of developing country labor markets.

The authors analyze wage determination and gender discrimination in Romania using the 1994 Romanian Household survey. They estimate wages for men and women in urban and rural areas using a Heckman selection model. They analyze gender discrimination in offered wages, to address the methodological shortcomings found in the literature. Increasing returns to education and experience are consistently significant for both men and women in urban and rural areas. Returns to education are greater in rural than in urban areas, especially for women. Labor markets are segmented regionally, probably as a result of the country's economic history, especially the spatial allocation of resources under a centrally planned economy. Only with economic liberalization has the specialization of specific regions translated into differences in regional performance and hence local economic differences. They found discrimination against women in both urban and rural labor markets, especially at low levels of education. The observed bias against women in urban areas is comparable to that found in other Western countries--but in the region's rural settings the bias is much greater than in the West. With the adjustment to market forces, as less-skilled workers face increasing difficulties in the region, women's relative wages may be expected to decline further. Discrepancy in pay also directly affects the level of pensions, unemployment benefits, and other means-tested benefits to workers, contributing to pauperization.