Competitive and Segmented Informal Labor Markets

It has recently been argued that the informal sector in developing countries shows a dual structure, with part of the informal sector being competitive to the formal sector and part of the informal sector being the result of market segmentation. We formulate an econometric model to test this hypothesis. The model allows for sector multiplicity with unobserved sector affiliation in the informal sector and takes into account sample selection bias induced by the employment decision of individuals. An estimation of the model for the urban labor market in Côte d'Ivoire shows that the informal labor market is indeed composed of two segments with both competitive as well as segmented employment.