Job informality, income and internal migration: evidence from Indonesia

Informal employment is widespread in many developing countries but the informal sector is difficult to identify and assess. Two major contributions to the existing literature are made in this paper. Firstly, a new index of informality is derived that attempts to capture the degree of informality in individual employment by including factors related to workplace conditions and worker entitlements. This contrasts with the dichotomous indicators used in most previous research. Secondly, a remuneration package rather than just the monthly wage is used to achieve a better measure of the full return to employment. The study makes use of longitudinal data from the Rural-Urban Migration in Indonesia project for year 2008 and 2009. The analysis reveals that informal employment imposes a penalty for both migrants and non-migrants, although the latter group faces a larger penalty. The new index provides evidence that there is an informality penalty even when using an informality measure which moves beyond firm size. Rural-urban migrants seem to receive higher earnings than non-migrants, although this premium was largely visible in the lower end of the earnings distribution. Finally, there is some evidence that the penalty associated with informality is linked to the prosperity of the region.