How does informal employment impact income inequality?

ABSTRACT

This study investigates how informal employment impacts total income inequality in urban China. Finite mixture methodology is employed to examine the segments that exist in the informal labour market, and the Theil index (T0) is used to break down total income inequality according to different subsamples. We found that the two-segment model (upper-tier and lower-tier) best describes the structure of the informal labour market in urban China and that the upper-tier segment contributes most to the total income inequality.

KEYWORDS:

• Informal employment
• income inequality
• segmented labour market
• finite mixture model

JEL CLASSIFICATION:

• J21
• J31
• J42

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ We also estimate the model for the three-segment informal labour market; however, only 1.3% of informal employment workers belong to the third segment. Consequently, we stopped estimating three-and-more segment models in the informal labour market.

Additional information

Funding

This work was supported by The Philosophy and Social Sciences Planning Project of the Zhejiang province [14NDJC119YB]; The Qianjiang Talent Plan of the Zhejiang province [QJC1402001]; Center for Labor Economics and Public Policy Studies of Zhejiang University.