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Labor Earnings Dynamics in a Developing Economy with a Large Informal Sector

Authors 
Diego B. P. Gomes
Felipe S. Iachan
Cezar Santos
Publication Year 
2020
JEL Code 
E24 - Employment; Unemployment; Wages
E26 - Informal Economy; Underground Economy
J24 - Human Capital; Skills; Occupational Choice; Labor Productivity
J31 - Wage Level and Structure; Wage Differentials by Skill, Training, Occupation, etc.
O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
Abstract 
We study labor earnings dynamics in a developing economy with a large informal sector. We use nationally representative Brazilian panel data that cover both formal and informal workers. We document large disparities in earnings fluctuations faced by these segments of the labor market, as well as the high frequency of transitions between them. Informality is associated with more volatile earnings, while workers in the formal sector are subject to significant downside risk. Transitions between formal and informal employment bring large asymmetric earnings shocks and have a frequency that depends on age and the initial earnings level.
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