Informal employment in Chile : unobserved heterogeneity andgender-based differences

Abstract

This paper studies the presence of different groups of workers in the informal labour sector in Chile. To deal with this unobserved heterogeneity, a Finite Mixture Model (FMM) is developed, finding the optimal number of segments in the informal sector. The model also generates different wage equations for each segment, allowing to estimate in which segment workers would maximize their wages. With this, the estimated sizes of each segment and the theoretical sizes that would result from a free mobility context are compared to test the existence of segmentation. Results show statistical support for 2 informal segments in all the specifications estimated. Then, the segmentation test showed that formal workers are over-represented and that voluntary informal employment seems to be the most desirable choice. However, in a hypothetical free mobility scenario, there is also some mobility between sectors, especially for informal workers. This is evidence that informal workers may be facing some restrictions in their wage-maximizing process too. Nevertheless, voluntary informality seems to be the most prevalent situation in the Chilean labour market.