Abstract

The paper performs both a parametric and non-parametric analysis to address a fundamental question in the growing literature using search models to study labor market informality: Should informal self-employment and informal employment as an employee be considered two different labor market states? Both analyses strongly reject equality between the two states, cautioning against aggregating them in a common “informality state”. The parametric model identifies that the variation in informal self-employment income and the short duration of informal employee jobs are the primary factors that contribute to the observed differences between these labor market states.