Foreword xi

Acknowledgments xv

About the Authors xix

Overview xxi

Abbreviations xxxvii

Introduction 1

Toward a Comprehensive Model of the Labor Market 4

Policy to Reach the Three Goals of Coverage, Quality Jobs, and Growth 11

Notes 13

References 14

1 Job Amenities and the Attraction of Self-Employment 17

Self-Employment and Microfirms as the Central Axis of Analysis of the Informal Sector 17

Self-Employment as a Global Phenomenon 19

The View from the Advanced Economies 21

The Fuzzy Distinction Between “Opportunity” and “Necessity” Self-Employment 23

Developing Countries Share the Global Preference for Self-Employment 25

Why Does Self-Employment Decline with Income, and What Causes Divergence from This Trend? 31

How Much Is Being Your Own Boss Worth? Measuring Amenity Value 38

Measuring Segmentation and Necessity Entrepreneurship Through Amenity-Adjusted Wage Comparisons 46

Conclusion 47

Notes 48

References 50

2 The Global Microfirm Paradox Satisfied Entrepreneurs but Limited Growth 55

The Growth Dynamics of Microfirms 55

The Entry and Exit Dynamics of Microfirms 56

The Dynamics of Entry and Exit Viewed Through Labor Flows 58

Why Does Self-Employment Increase Across the Life Cycle? 62

The Role of Credit Constraints in Limiting Firm Size and Entrepreneurship 64

Microfirms Everywhere Do Not Grow Very Much 67

Credit Is a Limited Barrier to Growth 68

The Double Distribution of Firms 69

The Decision to Formalize: Formality as an Input for Growth 71

Conclusion 75

Notes 76

References 76

3 Informal Workers, Household Optimization, and Labor Market Distortions 81

Introduction 81

Who Are the Informal Salaried Workers? 82

Entry into Informal Salaried Work: Less Opportunity, More Necessity than Self-Employment 83

What Amenities Do the Informal Salaried Value? 87

The Increasingly Fuzzy Distinction Between Formal and Informal Employment 89

Household Decisions, Unpaid Work, and Universal Social Protection Coverage 94

Labor Market Frictions and Necessity Informality 97

Typology of the Dependent Informal 100

Conclusion 112

Notes 113

References 114

4 Policy Recommendations 117

A Comprehensive Framework to Understand the Developing-Country Labor Market and Design Effective Policy 117

Policy Recommendations 126

Data Needed 138

Conclusions 139

Notes 140

References 140