Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico

This article offers an alternative to the traditional dualistic view of the relationship be-tween formal and informal labor markets. For many workers inefficiencies in formal sector protections and low levels of labor productivity may make informal sector em-ployment a desirable alternative to formal sector employment. The analysis offers the first study of worker transitions between sectors using detailed panel data from Mexico and finds little evidence in favor of the dualistic view. Traditional earnings differentials cannot prove or disprove segmentation in the developing-country context. The patterns of worker mobility do not suggest a rigid labor market or one segmented along the formal/informal division. In developing countries roughly 40 percent of urban workers are not protected by labor legislation and work in small, informal firms.1 The origins and dynam-ics of the informal sector have attracted renewed interest for at least two reasons. First, increasing labor market efficiency and flexibility are considered essential complements to the market-based reforms under way throughout the developing world (see, for example, World Bank 1995). To the degree that the informal