Wage Gaps between Formals and Informals

This paper borrows the non parametric approach proposed by Ñopo (2004) to calculate the wage gap between formal and informal workers in Peru. Using data from the 2007 National Household Survey, the wage gap is decomposed into four components, two of which represent the differences related to observable and unobservable characteristics between formal and informal workers. For employees, these differences account for 55 and 18 percent of the gap, respectively. For independent workers, on the other hand, they represent 37 and 27 percent of the gap, respectively. Then the wage gap is not attributable solely to observable factors associated with labor supply.