Earnings, education and segmented labour markets in Brazil: A comparison between Recife and Sao Paulo

Formal-informal earnings differentials in urban labour markets in Brazil tend to persist and the gap does not appear to be narrowing. This thesis, using individual-level primary data from cross-section surveys for 5 years between 1981 and 1989 and assigning contributors to social security to the formal sector (non-contributors to the informal), attempts to explain this phenomenon by examining sectoral differences in returns to education in two typical metropolitan areas. By resorting to segmented labour market theories and to elements of the human capital model, the thesis establishes an analytical model tailored to the particular characteristics of urban labour markets in Brazil. The formal-informal segmentation hypothesis is confirmed in both regions whilst no evidence of geographical segmentation is detected. Returns to education differ significantly according to occupational position (wage-employment & self-employment). Education is found to be a major influence on earnings inequality, on entry to the formal market and on the probability of being employed in the formal sector. Evidence of sex discrimination is also found. Wage equations are first estimated by standard ordinary least squares, the analysis being further expanded to incorporate Heckman's selectivity-bias technique to correct for the unemployment and segmentation biases. The thesis culminates by discussing policy issues, with focus on three general ideas: a) attempts to "abolish" the informal labour market by enforcing the law more strictly, that is, via a thorough elimination of illegal job contracts; b) efforts to improve the access to primary labour markets; and c) educational policies with redistributive goals. Gini coefficients based on simulated earnings distributions are used to examine this latter issue and the main conclusion is that there is room for making education play a limited, but important, redistributive role in a broader context of better use of public resources in Brazil