Informal Labour and Credit Markets: A Survey.

and regional data for Brazil and Italy (i.e. two countries with a large informal economy)
provide evidence of

• a positive correlation between unemployment and shadow employment (SF 8)

An attempt to explain the possibility that Governments hide high level of unemployment
with the presence of a large informal sector is provided in the theoretical section of their
paper.

Given that the search matching literature is mainly based on the idea that workers are
free to choose between formal and informal sector, the empirical question related to the
segmented or voluntary choice view of informality requires further investigation. Bosch and
Maloney (2006) provide evidence that the performance of labour markets is asymmetric
during business cycles. In particular, it supports the voluntary decision during expansion
while it is in favor of segmentation during recessions.¹³ As pointed out in Perry et al.
(2007), voluntary entry may not rule out some degree of market segmentation. While
individuals are free to choose between the two sectors, the introduction of various labour
market regulations make informal jobs less attractive or decrease the number of formal
vacancies. In this sense, the search-matching literature reviewed in section 4 is able to
take this sort of flexibility into account. See Satchi and Temple (2009) and Zenou (2008),
reviewed in this survey, for a modelling strategy with search frictions focusing on the
dualistic nature of informality.

Evidence on Latin America in favor of the existence of a wage premium for formal
workers is ambiguous and depends on the category of informal job (i.e.self-employed are
in general better paid than salaried workers). Different views are reported in the NCEUS
report. In India the bulk of organized sector employment is paid employment (casual
and regular/salaried), while the bulk of the unorganise sector is self-employment and poor
quality casual workers. The report finds that while there seems to be no apparent different
in wages for casual workers, regular workers in the informal sector are paid considerably
less than their informal counterparts. Similar findings are reported in Badaoui et al. (2006)
following an econometric studies using the South African Labor Force Survey.¹⁴

¹³ See Perry et al. (2007) for further details on stylized facts concerning the voluntary or segmented view
of informality.

¹⁴As noted in Perry et al. (2007), this traditional comparison of wages between sectors and the existence
of a wage premium is not a proof of the existence of segmentation between formal and informal labour

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