1 Is There An Informal Sector Wage Penalty? Evidence from South Africa

We estimate the wage penalty associated with working in the informal sector. To this end we use a rich South African data set on males that allows one to accurately distinguish workers employed in the informal sector from those employed in the formal sector and link individuals over time. Implementing various econometric approaches we find that there is a gross wage penalty of a little over 12 per cent for working in the informal sector. However, once we reduce our sample to a group for which we can reasonably calculate earnings net of taxes the wage penalty disappears