The article addresses a fundamental question in the growing literature that uses search models to study informality in the labor market: Should informal self-employment and informal employment as an employee be considered two different labor states? Both analyses strongly reject the equality between the two states, warning against aggregating them into a common "state of informality." The parametric model identifies that the variation in incomes from informal self-employment and the short duration of informal employment as an employee are the main factors contributing to the observed differences between these labor market states.

"The statistical tests we use robustly reject the idea that these two labor market states are the same from the workers' behavioral standpoint, which suggests they should not be grouped under a single 'state of informality'," explains Professor Tejada. "Furthermore, the main sources of differences between the two are the high variability of incomes in self-employment and the short duration of informal salaried jobs," Mauricio Tejada explained when consulted by the Universidad Diego Portales.

Luca Flabbi co-authored the article alongside Tejada. Economic Letters is an open-access academic journal dedicated to finance, economics, and econometrics, published by the Danish publisher Elsevier.

Full article: https://www.sciencedirect.com/science/article/pii/S0165176523003038