Informal Jobs and Contribution to Social Security: Evidence from a Double Selection Model

Abstract

We estimate a double selection model to study informality in the Chilean labor market. We use three different measures of informality: lack of a signed contract, contribution to social security and both at the same time. The double selection states that, in a first stage, individuals chose between the formal and informal sector, the one that gives them the highest utility, and in a second stage, employers will select some workers from the ones that chose the formal sector, but some workers will not be chosen and then will be excluded from the formal sector. We find that this double selection model fits the data better than a simple selection model, confirming that there is some exclusion. We also find that education is that variable that is most highly correlated with informality. Finally, the results suggest that the head of the household is less likely to be informal, which could imply that informality affects mostly the secondary labor force in the household. Also, the number of children are negatively correlated with being formal.