We find that the wage differential between formal/regulated and informal/unregulated sectors increased after 2008. Moreover, while wages in the informal sector decreased by about 20% in 2008-13, wages in the formal sector virtually did not fall. This is consistent with the view of a substantial downward stickiness of wages in the regulated labour market. Importantly, before the recession, wages in the formal and informal sectors moved in parallel (with a 15% premium in the formal sector) – confirming the validity of the parallel trends assumption essential for our difference-in-differences methodology, and showing that both regulated and unregulated labour markets have a similar degree of upward flexibility of wages.
We also look at the employment changes in the two sectors. We find that in 2008-2013, employment in the formal labour market fell by 16%. At the same time, employment in the informal labour market did not vary – if anything, it increased slightly (by 1.6%), although the change is not statistically significant. This finding is fully consistent with the conventional narrative – the downward rigidity of formal wages result in formal workers losing jobs or moving to the informal sector.
That is from Sergei Guriev, Biagio Speciale, Michele Tuccio, more data and discussion at the link. I would note, however, that the formal and informal sector differ in ways other than just their degree of regulation. When labor contracts are truly short-term, and there is less morale-building in the enterprise, wages may be less sticky for non-legal reasons. And those are the firms most likely to end up in the informal sector. Still, there is an interesting and striking contrast.