In spite of its predominant economic weight in developing countries, little is known about informal sector
income dynamics vis-à-vis the formal sector. Some works have been done in this field using household
surveys, but they only consider some emerging Latin American countries (Argentina, Brazil, Colombia and
Mexico; Gong et al., 2004; Perry et al., 2007; Bargain and Kwenda, 2011) and more recently South Africa,
Ghana and Tanzania for Africa (Falco et al., 2010) and Vietnam for Asia (Nguyen et al., 2011). As a matter of
consequence, there is still no way to generalize the (diverging) results to very poor part of the developing
world. Taking advantage of the rich 1-2-3 Surveys dataset in Madagascar, in particular its four waves panel
data (2000, 2001, 2003 and 2004), we assess the magnitude of various formal/informal sector earnings gaps
while addressing heterogeneity issues at three different levels: the worker, the job (wage employment vs. selfemployment)
and the earnings distribution. The questions asked are the following: Is there an informal sector
job earnings penalty? Do some informal sector jobs provide pecuniary premiums? Which ones? Do possible
gaps vary along the earnings distribution? Standard earnings equations are estimated at the mean and at various
conditional quantiles of the earnings distribution. In particular, we estimate fixed effects quantile regressions to
control for unobserved individual characteristics, focusing particularly on heterogeneity within both the formal
and informal sector categories. Our results suggest that the informal sector earnings gap highly depends on the
workers’ job status and on their relative position in the earnings distribution. Penalties may in some cases turn
into premiums. By comparing our results with studies in other developing countries, we draw conclusions
highlighting the Madagascar’s labour market specificity.
