September 2006

IZA DP No. 2349: Competitive and Segmented Informal Labor Markets

revised version published as 'Informal employment in developing countries: Opportunity or last resort?' in: Journal of Development Economics, 2012, 97 (1), 88-98

It has been recently argued that the informal sector of the labor market in a developing economy shows a dual structure with one part of it being competitive to the formal sector and another part being the result of market segmentation. To test this hypothesis we formulate an econometric model which allows for a heterogeneous informal sector with unobserved individual affiliation and which takes into account selection bias induced by the employment decision of individuals. Our test results for the urban labor market in Côte d'Ivoire indeed show existence of both competitive and segmented employment in the informal sector.