Informal Employment and Wage Inequality:Evidence from Surveys of Employees in Labor-intensive Enterprises
In addition to the self-employed,informal employment includes employees who are part-time workers,who do not have formal labor contracts,and whose job assignments come from a platform.In recent years,a significant num-ber of enterprises in China have hired informal workers to circumvent labor market regulations and adjust employment more easily when facing economic uncertainties.Technological changes,such as digitalization,also cause burgeoning new types of informal employment(e.g.,platform workers).From the perspective of the supply side,the evolving demo-graphics of the workforce(e.g.,population aging and more highly educated married women)have resulted in an increas-ing demand for work flexibility.Meanwhile,the past two decades have witnessed a growing wage inequality in urban China.How does informal employment influence workers'wage levels?What are the underlying mechanisms?What will happen to wage inequality when more workers are employed as informal workers?Exploring these issues is key to understanding China's income inequality and to making policies to reduce it.Based on the data of over 450,000 employees from over 40,000 labor-intensive enterprises collected in 2020 and 2021,this paper finds that the average wage level of informal employment is significantly less than formal employment by 0.184 log points and about half of the gap can be explained by education and professional skills.After controlling per-sonal characteristics and city and firm fixed effects,informal workers'income is still significantly less than formal work-ers by around 6％.With higher percentiles of the wage distribution,the wage level for informal employment surpasses that of formal employment.The mechanism analysis indicates that lower basic wages and the pursuit of job flexibility re-sult in lower wage incomes for informal employees.However,informal workers face more flexible wage determination mechanisms.Higher returns to professional skill(rather than education levels),especially in performance pay,result in some skilled informal workers receiving higher wages than formal workers.The counterfactual analysis indicates that shifting the workforce from informal to formal employment will lead to a nearly 32％increase in overall wage inequality.Examining various employee groups by gender,age,household registra-tion(Hukou)status,education,professional skill levels,type of labor contract,and part-time vs.full-time work status indi-cates that informal employment tends to exacerbate wage inequality among all groups.Notably,part-time informal em-ployment without labor contract protection tends to cause higher wage inequality in China than other types of informal employment.The contributions of this paper are as follows.First,previous studies mainly used household survey data to examine the impact of informal employment on wage inequality.The employee-employer matched data used in this paper enable us to control variables at the enterprise level,significantly improving the model's goodness of fit and helping address en-dogeneity problems stemming from(otherwise)omitted enterprise-level factors.Additionally,the information on wage components(e.g.,basic salary and performance pay),employee title,and skill level allows for a more detailed mechanism analysis.Second,most existing studies used decomposition methods to examine the formal-informal wage gap.This paper analyzes the mechanism of the wage gap from the perspectives of wage determination and workers'pursuit of flexibility.This paper considers both general education and professional skills and explores their roles in the determination of differ-ent components of wages.It not only sheds light on the difference in average wages but also explains why some informal employees can achieve higher wages.Third,using the counterfactual analysis,this paper examines how the enlargement of informal employment will af-fect the wage inequality for workers in labor-intensive enterprises in China.It also explores the heterogeneity of the im-pact for different groups in terms of personal and work characteristics,as well as the heterogeneity of the impact of differ-ent types of informal employment.These analyses enable us to propose targeted policy recommendations to counterbal-ance the negative impact of informal employment on wage inequality.
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