S021759081950019X

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Article Title: Wage Discrimination in India’s Formal and Informal Labour markets
Author(s): Bhaskar Jyoti Neog, Bimal Kishore Sahoo
DOI: 10.1142/S021759081950019X
Received: 18 July 2018
Accepted: 13 February 2019

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To be cited as: Bhaskar Jyoti Neog, Bimal Kishore Sahoo, Wage Discrimination in India’s
Formal and Informal Labour markets, The Singapore Economic Review,
doi: 10.1142/S021759081950019X
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Wage Discrimination in India's Formal and Informal Labour markets
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Abstract
The study examines the extent of gender and caste-based discrimination among the formally and
informally employed in India using the National Sample Survey Office (NSSO) Employment-
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Unemployment Survey (EUS) data for the four major rounds from 1999-00 to 2011-12. Oaxaca-
Blinder decomposition results corrected for self-selection show wage discrimination to be
significantly higher in informal employment compared to the formally employed. Similarly,
caste-based discrimination is found to be lower compared to gender-based discrimination. The

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quantile decomposition results show discrimination to vary across the quantiles. Our results
highlight the need for better regulation of the informal labour market in India.
Keywords: Gender; Caste; Discrimination; Decomposition; Quantile; Informal; Regulation.

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JEL: J31, J38, J71, J78.
1. Introduction
The Indian economy embarked on a process of major economic reforms in the early
1990s. Although such reforms have markedly improved economic growth rates, they were also
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accompanied by rising socio-economic inequalities (Ahluwalia, 2011; Subramanian & Jayaraj,
2015). Gender and caste-based discrimination can be a major factor influencing these trends 1. In
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Caste is an English word that translates into two concepts- varna and jati. Under the varna system, the society is
divided broadly into five distinct sub-groups characterized by endogamy, hereditary membership and specific
occupations. These are brahmins (priests), kshatriyas (warriors), vaisyas (traders), sudras (those engaged in menial
works) and the Ati Sudras (the formerly untouchables). Jatis are the thousands of narrower sub-groups which forms
the operative code in everyday lives. The varnas provide the broader classification system to which the jatis try to
align although the relation between the two is much more complex (Deshpande, 2000). Additionally, there is a 50-
million strong tribal population in India which have lifestyles, habitats and languages quite distinct from other
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known languages in India (Kijima, 2006). After Independence, the Constitution of India ratified affirmative action
and statutory reservations for Scheduled Castes (SCs, primarily composed of the lower varnas such as Sudras and
the Ati Sudras) and Scheduled Tribes (STs, chiefly consisting of the tribal population). In the 1990s, after much
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other words, discrimination can be an important reason that results in high inequality across
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social groups. Therefore, it is critical to examine the extent of gender and caste-based
discrimination in the labour market in India. Further, it is necessary to understand how the
process of liberalisation has shaped the scenario of discrimination in the Indian labour market
over the years. The present study is a modest endeavour towards this.
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Although the literature discusses a number of factors influencing such discrimination, an
issue that has received much attention in the recent literature is the role of wage setting
institutions and regulations in explaining wage discrimination (Arulampalam, Booth, & Bryan,
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2007; Blau & Kahn, 2003; Weichselbaumer & Winter-Ebmer, 2007). In this regard, Peetz (2015)
stresses on the role of ‘regulation proximity’ or the extent to which the terms of employment of
particular workers are regulated, including by collective agreements, legislation or other

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instruments, in influencing discrimination. He concludes that workers in jobs with low regulation
proximity would be likely to suffer more discrimination by increasing “the likelihood that norms
and cultures that favour those in power (men) will dominate outcomes”. As such, in societies
where discriminatory social norms prevail, discrimination would be higher the greater the
market-orientation of the economy. At the other end of the spectrum, proponents of globalisation
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argue that more liberalisation and competition would loosen the hitherto monopolies and reduce
the dominance of those hitherto in power (men and upper-castes), leading to lesser
discrimination and more equal outcomes (Becker, 1957; Neetha, 2014).

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Most of the relevant literature on this is related to the comparison of discrimination in the
public sector and the private sector (Arulampalam et al., 2007; Duraisamy & Duraisamy, 2016;
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debate and deliberations, a third group called the Other Backward Class (OBC, consisting of a heterogeneous group
of socially, economically and educationally backward sections of the society) was made eligible for reservations
(Vaid, 2014).
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Gornick & Jacobs, 1998; Hoffnar & Greene, 1996; Miller, 2009). A majority of such studies
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have found wage discrimination to be higher in the sector with low regulation proximity, i.e. the
private sector. However, a public sector vs private sector comparison in developing countries
like India is flawed as a large and rising proportion of the public sector jobs are informal in
nature (Table 1). Hence their wages are more likely to be influenced by social norms and
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competition rather than statutory rules and regulations. Similarly, many jobs in the private sector
are likely to be formal in nature. Similar problems arise in comparing the wages of regular vs
casual workers, as is done in Duraisamy & Duraisamy (2016). Other studies concentrating on
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cross-country experiences have similarly found that countries with a largely regulated labour
market, characterised by highly centralised and unionised wage setting mechanisms have lower
gender wage gaps (Arulampalam et al., 2007; Blau & Kahn, 2003).
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Our study aims to shed more light on the issue by examining wage discrimination
separately in the formal and informal economy. The extent of discrimination is likely to vary in
the formal and the informal employment due to the markedly different wage-setting mechanism
in the two labour markets. Within formal employment, we find that anti-discrimination and equal
treatment laws and regulations play a major role. On the other hand, such regulations and wage
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bargaining processes are completely absent in informal employment; and it is mainly
competition as well as social norms favouring the dominant groups, that play the upper hand
(Carrington, McCue, & Pierce, 2000; International Labour Office, 2003; Saget, 2006). Such stark
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differences in the wage setting mechanism of the two segments thus enable us to empirically
study the role of regulation as well as liberalisation in shaping discrimination. Further, studying
the trend in wage discrimination in informal employment is important in itself given the large
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and burgeoning size of the informal workforce.
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The paper is divided into five sections. Section 2 discusses the theory and empirical
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evidence relating to labour market discrimination. Section 3 presents the data and the
methodology. Sections 4 presents a discussion on the results of the paper. Finally, Section 5
concludes the study and makes some policy prescriptions.

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2. Theoretical Literature and Empirical Evidence
2.1.Theoretical Literature
Within the ‘mainstream’ economics literature, theoretical models have mainly focused on
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three broad factors- human capital differences; prejudice and imperfect information. The first of
these mainly focus on differences in the characteristics of workers in explaining the gender wage
gap. The second of these emphasise the taste for discrimination “by at least some members of the
majority group against interacting with members of the minority group" (Altonji & Blank, 1999;
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Becker, 1957). Becker (1957) models such ‘taste-based’ discrimination separately from the
alternative perspectives when the prejudiced agent is the employer, employees or the consumers.
The third factor emphasize the role of imperfect information as firms with imperfect information
about the skills and productivity of workers use easily observable traits such as gender or caste
(under the assumption that such traits are correlated with productivity), to distinguish between
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high and low productivity workers (Arrow, 1971; Phelps, 1972).
Theoretical perspectives on discrimination outside the mainstream economics have
mainly come from the sociological as well as the Marxist literature. Prominent among the
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sociological theories is the conflict theory which posits discrimination as a ploy used by the
dominant group members to monopolise and exclude the access of valuable economic and social
resources away from out-of-group members (Blumer, 1958).

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Tilly (1999) similarly attributes discrimination due to the institutionalisation of
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categorical differences (based on ‘rigid’ markers such as sex or race). Another important theory
from the sociology discipline due to Reskin (2000), counter Blumer's (1958) assertion of a
conscious categorisation of individuals into in-group and out-of-group members. The author
rather argues that much of the categorisation is automatic and sub-conscious based on social and
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cultural markers such as sex and race (Reskin, 2000). Within the Marxist tradition, Reich (1978)
asserts that feelings of prejudice among one group of employees against other groups is a tool
used by capitalists to ‘divide-and-conquer’ the labour force and extract the maximum profits.
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The existing theoretical understanding of the relationship between liberalisation and
discrimination is heavily influenced by Becker (1957). Becker (1957) argues that increased
competition from international trade and liberalisation would make taste-based discrimination
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costly and would ultimately eliminate it. However, Borjas & Bronars (1989) and others
extending the Becker (1957) model for the presence of search costs, show that such
discrimination can persist in the long run even in a competitive labour market (Altonji & Blank,
1999). Other theoretical models, similarly, do not offer any unambiguous conclusion on the
effect of liberalisation on discrimination.

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On the other hand, Menon & Rodgers (2009) and Rosén (2003) show that discrimination
can increase with rising liberalisation. In their models, discriminatory employers, faced with
rising competition, lower the wages of women relative to men. Non-discriminatory employers
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earn lower profits compared to discriminatory employers leading to the exit of non-
discriminatory employers from the market. As such, discrimination against women is likely to
rise with increasing competition in the labour market.

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2.2. Empirical Evidence
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Numerous studies have empirically tried to study the extent of wage discrimination in the
labour market. A number of studies have also attempted to analyse the impact of rising
competition and liberalisation on labour market discrimination (Berik, Rodgers, & Zveglich,
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2004; Black & Brainerd, 2004; Hazarika & Otero, 2004; Menon & Rodgers, 2009). While there
is an ongoing debate on the impact of globalisation on discrimination (Weisskopf, 2010),
existing empirical evidence has failed to provide a coherent picture on the issue.
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Studies also find evidence of significant gender discrimination in the Indian labour
market across various segments (Agrawal, 2013; Duraisamy & Duraisamy, 2016; Jacob, 2006;
Kingdon & Unni, 2001; Sengupta & Das, 2015). In this context, studies have noted a general
trend of rising gender discrimination over time as well as the presence of a sticky floor effect
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over the wage distribution. Discrimination based on caste has also been the subject of a number
of decomposition and experimental studies in India (A. Banerjee, Bertrand, Datta, &
Mullainathan, 2009; B. Banerjee & Knight, 1985; Jacob, 2006; Madheswaran, 2006;
Madheswaran & Attewell, 2007; Siddique, 2011). Decomposition-based studies show that the
extent of caste-based discrimination, though significant, is found to be significantly smaller than

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gender discrimination.
Further, many studies on gender and caste-based discrimination in India report a complex
picture reporting discrimination to vary with several other factors such as religion, gender, caste
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and employer characteristics (A. Banerjee et al., 2009; Duraisamy & Duraisamy, 2016; Sengupta
& Das, 2015; Siddique, 2011). Our study complements this literature by comparing
discrimination in India’s formal and informal economies. Such an exercise would extend our
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understanding of how wage setting structure and institutions influence the extent of
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discrimination in the labour market.
Although, the study by Duraisamy & Duraisamy (2016) explore a similar issue by
comparing discrimination between private (casual) and public (regular) labour market segments,
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as argued Section 1, a formal vs. informal dichotomy offers a much starker and clearer contrast
to study the role of institutions and regulations on labour market discrimination. Additionally,
Duraisamy & Duraisamy (2016) do not control for self-selection which might significantly bias
their results. Similarly, although Deininger, Jin, & Nagarajan (2013) study discrimination in
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India’s casual labour market, their analysis is restricted to rural areas and as such neglects a large
segment of the urban workforce. Further, they do not provide comparable estimates of
discrimination in the formal (or regular) jobs in India.

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The few studies that have looked into the issue of wage discrimination in the formal and
informal employment have found mixed results. While some studies find evidence of higher
discrimination in informal employment (Funkhouser, 1996), others find evidence to the contrary
(Ben Yahmed, 2018; Pignatti, 2010; Tansel, 2001). However, to the best of our knowledge, there
is no study in India which provides a systematic comparison of discrimination in the formal and
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informal economies.
3. Data and Methodology
3.1. Data Description

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The study uses unit level data from the National Sample Survey Organisation (NSSO)
Employment-Unemployment Survey (EUS) for four years 1999-2000, 2004-05, 2009-10 and
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2011-12. The sample size is representative at both national and sub-national (state) level. The
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EUS for the four rounds contains information on the enterprise size and type, employment status
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and the availability of social security benefits to workers. We have utilised this information to
distinguish between formal and informal employment. We have used the NCEUS methodology
modifying it suitably for our purpose of classifying workers into formal and informal
employment. Details are provided in Appendix-1 to the paper Sahoo & Neog, (2017). Further, it
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provides individual and household level information that we have used for further analysis. We
carry out our analysis excluding the cultivators as information on the availability of social
security benefits as well as enterprise type, or the number of workers in the enterprise is not
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available for such workers.
NSSO also provides information on the wages of the workers in the last week. We divide
the weekly wages of the workers by the number of days worked over the week to arrive at the
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daily wages of the workers. A problem with deriving wages for formal and informal workers
arises because information on firm size, social security benefits etc. used to determine
informality status is collected for a longer recall period of the last 365 days whereas information
on wages is available for a shorter recall period of the last seven days. Hence, information on
informality status and wages are not strictly compatible. The study attempts to overcome this
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problem by restricting the sample to individuals whose usual status codes, 5-digit NIC codes as
well as the 3-digit NCO codes are the same for the 365 recall period as well as the seven-day
recall period.
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3.2. Methodology
We perform the decomposition methodology proposed by Oaxaca (1973) and Blinder
(1973) to analyse the gender and caste-based wage gaps among formal and informal workers.
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However, Oaxaca-Blinder decomposition would give us unbiased decomposition estimates only
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under the assumption of Conditional Independence or Ignorability, which assume that once we
control for observable worker characteristics, selection into labour market segments is random
i.e. workers do not self-select into labour market segments based on their unobservable
characteristics (Fortin, Lemieux, & Firpo, 2011).

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If the assumption of Ignorability is violated, i.e. there is selection on unobservables, we
need to correct the decomposition results using a correction method proposed initially by
Heckman (1979). Since our sectoral choice decision is not limited to two choices as in the
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Heckman (1979) model but is extended to more than two choices, we follow a methodology
proposed by Lee (1983) to correct for possible selection on unobservables.
𝑗
Formally, suppose 𝐼𝑁𝑖 be the index of benefits to individual 𝑖 from the choice of 𝑗𝑡ℎ sector
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𝑗 𝑗
which depends on both observables 𝑍𝑖 and unobservables 𝑣𝑖 ,
𝑗 𝑗 𝑗
or, 𝐼𝑁𝑖 = 𝑍𝑖 𝛾 𝑗 + 𝑣𝑖 … … … … . . (1)
𝑗
In terms of this function, sectorial allocation depends on the index of benefits 𝐼𝑁𝑖 .
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i.e. 𝐷𝑖 = 𝑓(𝐼𝑁𝑖 ), where 𝐷𝑖 indexes the sectorial choice of the individual and 𝐷𝑖 = 𝑗, if the 𝑗𝑡ℎ
sector is chosen, 𝑗 = 1,2, . . 𝑘.
Since wages are observed for a particular sector, the conditional wage function is given by,
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𝐸(𝑤𝑖 ⎸𝐷 = 𝑗) = 𝑥𝑖 𝛽 + 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) … … . (2)
Here, 𝑤𝑖 represents wage earnings, 𝑥𝑖 is a vector of covariates and 𝛽 is the corresponding

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coefficient vector. 𝑢𝑖 represents the error term.
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If the assumption of Ignorability is violated, 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) ≠ 0, and the coefficient
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estimates from OLS would be inconsistent. To produce unbiased estimates of the 𝛽′𝑠, we include
the 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) as an additional regressor in our wage function.
Hence, our corrected wage function becomes,

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𝐸(𝑤𝑖 ⎸𝐷 = 𝑗) = 𝑥𝑖 𝛽 + 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) = 𝑥𝑖 𝛽 + 𝛿𝑗 𝜆𝑗 … … . (3)
Here, the selection term 𝜆𝑗 is an estimate of 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) and is analogous to the inverse
Mill’s ratio in the Heckman (1979) selection model and has been computed using the method
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proposed by Lee (1983) and Trost & Lee (1984). The implementation of the above procedure is
done in two stages. In the first stage, a multinomial logit model is run which models the sectorial
choice of the workers.

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[Insert Figure 1 here]
In our study of gender wage gaps in informal employment, the selection model has the
alternatives depicted in Model 1 (Figure 1). Similarly, the selection process for the formal
economy wage gaps as well as the caste-based wage gaps in the formal and informal economy
are depicted in Model 2, 3 and 4 respectively (Figure 1). The null hypothesis of the poolability of
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any two alternatives (choices) in the multinomial logit model is rejected at 1 per cent level of
significance 2. A crucial assumption of the multinomial logit selection model is the Independence
of Irrelevant Alternatives (IIA). However, Bourguignon, Fournier, & Gurgand (2006) has shown
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the Lee (1983) methodology to be quite robust to possible violation of the IIA assumption.
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2
We check for this using STATA’s mlogtest command.
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As a further check for the robustness of the results to a possible violation of IIA
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assumption, we model our participation decision using a binomial probit model as in Heckman
(1979). Formally, selection depends on the index function given by Eq. (1). Wages for a
𝑗 𝑗
particular sector 𝑗 is observed only if, 𝐼𝑁𝑖 > 0. Also, let 𝐵 𝑗 = 1, if 𝐼𝑁𝑖 > 0 and zero otherwise
Accordingly, our conditional wage function is given by,

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𝐸(𝑤𝑖 ⎸𝐵 𝑗 = 1) = 𝑥𝑖 𝛽 + 𝐸(𝑢𝑖 ⎸𝐵 𝑗 = 1) … … . . (4)
The selection corrected wage regression is given by,
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𝑗
𝐸(𝑤𝑖 ⎸𝐵 𝑗 = 1) = 𝐸(𝑤𝑖 ⎸𝐼𝑁𝑖 > 0) = 𝑥𝑖 𝛽 + 𝛿𝑗 𝜆𝑗 … … . . (5)
Here, the selection term, 𝜆𝑗 , also called the inverse Mill’s ratio, is an estimate of
𝐸(𝑢𝑖 ⎸𝐵 𝑗 = 1) and computed following Heckman (1979).

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Identification: For the proper identification of the model we need to include at least one
variable in the selection equation which is not there in the wage regression. The additional
variables, also called the selection instrument, should be such that it influences sectoral choice
but not the wages of the worker (Puhani, 2000). For our study, we have considered a dummy
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depicting whether there is any relative within the household who is formally employed.
We argue that the presence of a formally employed relative within the household
increases the probability of formal employment for the individual through networking effects
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(Ben Yahmed, 2018; Pratap & Quintin, 2006). Further, wages in the formal sector are generally
high and as such household incomes would be higher for households with a formal sector
employee. This reduces the probability of distress-driven employment among other household
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members. This is especially likely to be so for women who are likely to be driven into
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employment due to distress-driven factors (Dubey, Olsen, & Sen, 2017).
Secondly, we consider another dummy variable depicting whether there is any female
relative who is employed in wage employment. The role of cultural factors in influencing labour
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force participation in India has been amply highlighted in the literature on, especially among
women (Dubey et al., 2017; Neetha, 2014). The presence of a female relative engaged in wage
employment within the household is likely to imply that cultural environment within the
household is not so inimical to labour force participation of women. Finally, we interact the two
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dummy variables to derive a third selection instrument.
However, the above instruments are unlikely to likely to influence the productivity and
wages of the workers. Additionally, Puhani (2000) points out that the selection bias correction
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procedure is likely to be affected by high multicollinearity in the outcome equation. Leung & Yu
(1996) finds that if the condition number3 is less than 20, OLS results from the outcome equation
are not adversely affected. The predicted probabilities of the multinomial logit model are then
used to create the selection term. In the second stage, the wage regressions for formal and
informal workers are estimated including the selection term as an additional regressor.
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Decomposition at mean: Given the above selection bias correction for the wage
functions, Oaxaca-Blinder decomposition can be applied to the wage equations to study the wage
gap between the male and female workers. The same procedure applies for the analysis of wage
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The condition number is defined as the square root of the ratio of the largest and the smallest eigenvalue from the
moment matrix X’X.
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gaps between SC/ST and Non-SC/ST castes. Suppose the selection bias corrected wage function
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for male and female workers are given by-
𝑙𝑛𝑤𝑖𝑙 = 𝑋𝑖𝑙′ 𝛽 𝑙 + 𝜆𝑙𝑖 𝛿 𝑙 + 𝑢𝑖𝑙 … … . (6)
where, 𝑙 = {𝑀, 𝐹} denotes the two categories for whom the wage gap is being analyzed, 𝑖
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indexes individuals. 𝑙𝑛𝑤𝑖𝑙 is the log daily wages, 𝑋𝑖𝑙 is a vector of explanatory variables, 𝛽 𝑙 is the
corresponding coefficient estimates and 𝑢𝑖𝑙 ∼ 𝑁(0, 𝜎 2 ) is the error term. Also, 𝜆𝑙𝑖 is the selection
term and 𝛿 𝑙 is its estimated coefficient. The above equation is estimated using Ordinary Least
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Square (OLS) method.
Now, 𝐸(𝑙𝑛𝑤𝑖𝑙 ) = 𝑋𝑖𝑙′ 𝛽 𝑙 + 𝜆𝑙𝑖 𝛿 𝑙 … … . (7), since 𝐸(𝑢𝑖𝑙 ) = 0 by definition.
We define a vector 𝑋𝑖𝑙∗ such that 𝑋𝑖𝑙∗ includes 𝑋𝑖𝑙 in addition to 𝜆𝑙𝑖 . Similarly, the corresponding
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coefficient vector is 𝛽 ∗𝑙 which includes 𝛿 𝑙 in addition to 𝛽 𝑙 .
Accordingly, Eq. (7) can be written as,
𝐸(𝑙𝑛𝑤𝑖𝑙 ) = 𝑋𝑖∗𝑙′ 𝛽 ∗𝑙
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The wage gap between the two categories of workers is given by,
𝐺 = 𝐸(𝑙𝑛𝑤𝑖𝐹 ) − 𝐸(𝑙𝑛𝑤𝑖𝑀 )
′ ′
= 𝐸(𝑋𝑖∗𝐹 𝛽 ∗𝐹 ) − 𝐸(𝑋𝑖∗𝑀 𝛽 ∗𝑀 )
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′ ′
= 𝐸(𝑋𝑖∗𝐹 𝛽 ∗𝐹 − 𝑋𝑖∗𝑀 𝛽 ∗𝑀 )
Replacing the expected values of covariates by sample averages, we have,

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𝐺 = (𝑋̅ ∗𝐹′ 𝛽 ∗𝐹 − 𝑋̅ ∗𝑀′ 𝛽 ∗𝑀 )
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Suppose there is a non-discriminatory coefficients vector 𝛽̃. Following Fortin et al., (2011), we
take 𝛽̃ to be the coefficient vector from a pooled model, with a group membership dummy as an
additional regressor, so that our expression for decomposition becomes,

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′ ′
𝐺 = (𝑋̅ ∗𝐹 − 𝑋̅ ∗𝑀 )′ 𝛽 ∗ + [(𝛽̃ − 𝛽 ∗𝑀 )𝑋̅ ∗𝑀 + (𝛽 ∗𝐹 − 𝛽̃)𝑋̅ ∗𝐹 ] … . . (8)
The first term on the right-hand side corresponds to the endowment effect or the explained wage
gap; the second term within square bracket corresponds to the discrimination effect or the
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unexplained wage gap4.
Quantile Decomposition: The above method allows us to study the wage gap at the mean
of the wage distribution. However, to investigate further about the wage gap between formal and
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informal workers over the entire wage distribution we employ the Oaxaca-Blinder
decomposition method on the RIF-regression estimates. The RIF for a statistic (e.g., a quintile) is
a transformation of the outcome variable so that it aggregates back to the statistic of interest. A
RIF-regression is similar to a standard regression, except that the dependent variable, in our
case 𝑙𝑛𝑤𝑖𝑙 , is replaced by the (recentered) influence function of the statistic of interest (e.g., a
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quintile) (Firpo, Fortin, & Lemieux, 2009).
Following Fortin et al. (2011), the method comprises of two steps- In the first step, the
RIF of the dependent variable is estimated which is then used to run regressions of the RIF on
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the vector of covariates. We run two separate regressions for the two categories of workers,
separately for each quintile. In the second step, the corresponding coefficient vector can then be
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Computations are conducted using STATA’s oaxaca command.
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used to perform a standard Oaxaca-Blinder decomposition yielding decomposition results for the
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selected quintiles as follows:
′ ′
𝐺𝑞 = (𝑋̅ 𝐹 − 𝑋̅ 𝑀 )′ 𝛽𝑞 + [(𝛽̃𝑞 − 𝛽𝑞 𝑀 )𝑋̅ 𝑀 + (𝛽𝑞 𝐹 − 𝛽̃𝑞 )𝑋̅ 𝐹 ] … … (9)
where 𝑞 indexes the quintiles. Here, 𝐺𝑞 is the wage gap at the selected quintile 𝑞 and 𝛽 𝑙 , 𝑙 =
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{𝐹, 𝑀} are the coefficient estimates from the RIF-regression performed in the first step, at the
selected quintiles 𝑞. 𝛽̃𝑞 is defined as in Eq. (8). The first term on the right hand side represents
the endowment effect or the explained wage gap whereas the second term within square brackets
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denotes the discrimination effect or the unexplained wage gap5. However, the above
methodology cannot be extended to correct for any selection bias in our model (Firpo et al.,
2009; Fortin et al., 2011).

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3.3. Variable Description
The literature suggests a number of determinants of the earnings function. Apart from the
standard variables such as age, education (general and technical), gender, caste, religion, marital
status, rural-urban location and industrial affiliation, we also include additional job-specific and
firm-specific variables in our model. The role of age is captured using a continuous variable. The
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impact of education (general and technical) on wages is captured through a continuous variable
measuring years of general education and a dummy variable for the presence of technical
education of the worker6. The role of gender is studied through a dummy indicating that the
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5
Computations are conducted in STATA using the codes available at Prof. Nicole Fortin’s website:
(http://faculty.arts.ubc.ca/nfortin/datahead.html). Detailed methods are available upon request.
6
To derive our continuous variable for years of general education, we consider the years of education completed by
an individual. For example, a person having completed primary school would have five years of schooling whereas a
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person with graduate degree will have 15 years of education. For ‘Below Primary’ education, we take the expected
years of education i.e. the average of four (max) and zero (min) years of completed education by the person.
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worker is male. Similarly, separate dummies are generated for Scheduled Castes (SCs),
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Scheduled Tribes (STs) and Other Backward Castes (OBCs) while we exclude the ‘Other castes’
group (consisting of General castes) taking it as the reference category.
The impact of religion on informality is explored by including separate dummies for

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Muslims and ‘Other religions’ (consisting of all other religions except Hindus and Muslims),
considering Hindus as the reference group. Similarly, we generate separate dummies for being
married/divorced/widow and residing in a rural area to capture marital status and rural-urban
residence respectively. Finally, we include six separate dummies representing broad industrial
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groups viz. ‘agriculture’ (excluding cultivators); ‘mining, electricity & water supply’;
‘manufacturing’; ‘construction’; ‘community, social & personal services’; and ‘finance,
insurance & real estate’, with ‘trade, hotels & transportation’ acting as the reference category.
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Further, the literature also stresses the role of firm-specific and job-specific variables in
the wage determination process (Chatterji, Mumford, & Smith, 2011). We thus include separate
dummy variables for full-time work, whether the job is permanent and whether the job is a
regular job. Given the important role of unions in the wage determination process (Elvira &
Saporta, 2001), our study includes a dummy for union membership in the wage function. Further,
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the literature highlights the spatially concentrated nature of industrialisation as well as the
variation in the political and economic climate across states (Sanyal & Menon, 2005). We
control for such variation by including 24 dummies representing state-regions in our model.
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Further, using a methodology proposed in Ministry of Labour and Employment (Ministry
of Labour and Employment, n.d.), we divide the occupations titles of the workers into four
groups depending on the skill content of the job. We include dummy variables for three skill
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groups, excluding the fourth group as the reference category. We also include dummy variables
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depicting whether the firm is a public sector entity and whether the firm is in the unorganised
sector. Finally, a variable depicting the dependency ratio7 of the household is used in the
earnings equation.
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4. Results and Discussion
4.1. Descriptive Statistics
Descriptive statistics related to the entire sample as well as the different labour market
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segments are discussed below. We only present the results for the years 2004-05 and 20011-12
here (Table 2). Results for the years 1999-00 and 2009-10 portray a similar picture and are
available upon request. A look at Table 2 reveals that the percentage of SC/ST population in
formal employment is significantly lower than in informal employment 8. Further, we see that the
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mean years of education is significantly higher in formal employment compared with the
informally employed across all categories. Also, educational levels are higher for the
OBC/General workers and male workers compared to the SC/ST workers and female workers
respectively. Similarly, we find heterogeneities in the age profile and MPCE levels of workers
across labour market segments (Table 2). Finally, in line with our earlier contention on the
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unregulated nature of the informal economy, we find unionisation rates to be significantly lower
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7
An individual is considered to be a dependent if he is less than 5 years old or an elderly aged more than 59 years
who is not in the workforce. Dividing the number of dependents by the household size gives us the dependency
ratio.
8
Although NSSO provides caste affiliation on four groups (SC, ST, OBC and General), we combine the SC/ST
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groups and the OBC/General groups to form two distinct broad groups on which we make our comparison. This is
partly influenced by sample size considerations. Additionally, we find that wages and other characteristics are also
largely similar within our two broad groups.
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among the informally employed compared to the formally employed. The unionisation rate is
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also seen to be declining over time (Table 2).
[Insert Table 2 here]
Looking at the daily wages of workers, we see that wages differ considerably between
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different groups across formal and informal employment. Mean wages are significantly higher in
formal employment compared to the informally employed. Further, wages are comparatively
higher for males and the OBC/General groups. In general, informal employees, as well as SC/ST
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workers, are found to have significantly lower education levels, age, MPCE levels as well as
wages. Although wages and other endowments are also different between males and females, the
difference is comparatively lower than that between the SC/ST vs the OBC/General groups
(Table 2).
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4.2. Decomposition Results
Before looking at the decomposition results, we check whether the additional terms in the
selection model significantly influence the participation decision. We find that our selection
instruments significantly influence the participation decision. Additionally, as discussed in

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Section 3.2, the Oaxaca-Blinder decomposition results hinges on the fact that the outcome
equation does not suffer from collinearity issues. We find that the condition number in the
outcome equations are well below the threshold of 20 suggested by Leung & Yu (1996). The
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results for the above contentions are not presented here but is available upon request.
We take a look at the mean wage gaps as well as its breakdown into explained and
unexplained components for gender and caste in formal and the informal employment.
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Looking at the Oaxaca-Blinder decomposition results, we find that absolute wage gaps
have declined over the period in informal employment whereas wage gaps have increased
marginally in formal employment. Wage gaps are also quite larger in informal employment
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compared to the formally employed. Looking further at the selection-bias corrected
decomposition results show that within the informally employed a large part of the wage gap is
unexplained and is attributable to the discrimination effect whereas in formal employment,
endowment effect plays a much bigger role. Further, we find gender discrimination to have
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increased in informal employment so that in 2009-10 and 2011-12 it explains more than 100 per
cent of the gender wage gaps (Table 3). Our results tally with the findings reported in Deininger,
Jin, & Nagarajan (2013) who find significant gender discrimination in the Indian casual rural
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labour market. Our results are also similar to Duraisamy & Duraisamy (2016) who report higher
discrimination in the comparatively unregulated casual (private economy) labour market relative
to the regular (public economy) labour market. The uncorrected decomposition results depict a
similar picture.

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Looking at the Oaxaca-Blinder decomposition results for caste-based wage gaps, we find
overall wage gaps in the formal and informal employment to be positive and more or less stable
over time. Interestingly overall wage gaps are higher in formal employment compared to the
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informally employed. Within the informally employed, we find that the endowment effect and
the discrimination effect both play an important role in explaining the overall wage gap. Looking
at the formally employed, our results, in fact, indicate that the endowment effect explains almost
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the entire wage gap and the discrimination effect is insignificant or negative across the years
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(Table 4). This may be, in large part, due to the reservation policy of the government for the
SC/ST groups. Our results are quite similar to that of Siddique (2011) who find that caste-based
discrimination though absent in larger more established firms is evident in smaller firms. The
decomposition results without selection-bias correction give us a similar picture.

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The results of our study unambiguously show discrimination to be higher in the informal
economy compared to the formal economy. Such a result highlight the importance of
psychological constructs and prejudice (as embedded in social norms and customs) in facilitating
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discrimination as argued in the theories of Blumer, (1958), Reskin, (2000), Tilly, (1999), and
Becker, (1957). However, contrary to what was argued by Becker (1957), our study fails to find
any positive impact of liberalisation on reducing discrimination. In fact, discrimination seems to

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be higher in the less regulated (more liberalised) informal economy. Our results concur more
with the theoretical arguments of Rosén (2003) and Menon & Rodgers (2009) who posit
discrimination to increase with rising liberalisation in the economy.
4.3. Quantile Decomposition Results

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We next look at the extent of wage gaps and its constituents across quantiles. Given our
focus on the study of discrimination, we only present the results for unexplained wage gaps
across quantiles, to make our interpretation more concise and to the point (Table 5 and 6).
Results for the overall wage gaps as well as the endowment effects is available on request.
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[Insert Table 5 and Figure 2 here]
Looking at the quantile decomposition results for gender for the informally employed, we
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find that the unexplained wage gap starts from a high level and falls as we move towards the
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higher quantiles indicating the presence of sticky floor effect (Table 5; Figure 2). The results for
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gender discrimination in formal employment, on the other hand, show that the unexplained wage
gap is very high in the 10th quantile and then falls drastically as we move to the 70th quantile
before stabilizing or rising slightly in the 90th quantile (Figure 2; Table 5). This pattern is broadly
consistent with a sticky floor effect. Our results are similar to Duraisamy & Duraisamy (2016)
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who report a sticky floor effect in both the public and the private economies.
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Quantile decomposition results for the caste-based wage gaps for the informally
employed, on the other hand, show discrimination effect to be generally low and insignificant
across the quantiles for the informally employed (Table 6; Figure 2). In case of the formally
employed, our results find the unexplained wage gap to rise drastically in the initial quantiles
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before stabilising or even rising marginally in the later quantiles (Table 6; Figure 2). This pattern
is broadly consistent with a glass ceiling effect.
4.4. Interacting the formal-informal employment dichotomy with the public-private sector
dichotomy
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The discussion above provides vital insights into the impact of competition and
regulations in influencing discrimination. Although we argue that the formal-informal
employment dichotomy provides a more useful distinction compared to the public sector vs.
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private sector dichotomy in understanding such a mechanism, it would still be interesting to
study how the extent of discrimination varies when we interact the formal-informal employment
dichotomy with the public-private sector dichotomy.

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Accordingly, we run a regression as in Eq. (6), as follows,
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𝑙𝑛𝑤 = 𝛼1 𝐷 + 𝛼2 𝑆 + 𝛼3 𝐷 ∗ 𝑆 + 𝑋𝛽 + 𝑢 … … (10)
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Here, 𝑙𝑛𝑤 is the logarithm of daily wages, 𝐷 is the gender dummy equalling 1 if the
worker is male and else 0. Similarly, 𝑆 is the sector dummy equalling 1 if the worker works in
the public sector and else 0. 𝑋 is a vector of other control variables including the constant and the
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selection term and 𝛽 is the corresponding coefficient vector. We have made corrections for
possible selection on unobservables through the inclusion of the selection term using the method
of Lee, (1983). 𝛼2 is the coefficient of the sector dummy 𝑆 and 𝑢 is the error term. The co-
efficient 𝛼1 can be interpreted as the extent of gender-based discrimination in the private sector
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i.e. when 𝑆 equals 0. Similarly, the co-efficient 𝛼3 gives us the extent by which gender-based
discrimination differs between the public and the private sector. Finally, 𝛼1 + 𝛼3 gives us the
extent of gender-based discrimination in the public sector. Similarly, we can estimate the extent
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of variation in caste-based discrimination between the public and the private sectors. Table 7
reports the estimates of the coefficients 𝛼1 , 𝛼1 + 𝛼3 and 𝛼3 .
We prefer the single equation framework over the decomposition-based framework as the
later entails a significant reduction of sample size as we further sub-divide the sample between
the public and private sectors within the formal and informal economy. However, the single
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equation approach can be flawed9. As such the results in Table 7 should be interpreted with
caution. In line with our earlier results, Table 7 show discrimination across sectors to be higher
in the informal economy compared to the formal economy. Similarly, gender-based

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discrimination is found to be higher than caste-based discrimination across sectors.
Discrimination is not found to differ significantly between the public and private sectors in most
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Madheswaran & Attewell, (2007) point out that the single equation framework can yield biased results as it
assumes the wage structure to be identical for both the gender (or caste) groups.
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cases. However, we cannot completely rule out the hypothesis of no significant difference in
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discrimination between the public and the private sectors.
One such interesting case is caste-based discrimination in the formal economy where
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discrimination is significantly higher in the private sector compared to that in the public sector.
This result could be because SC/ST formal employees in the public sector enjoy the benefits of
reservation policy adopted by the government of India, whereas such policies are not applicable
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to formal employees in the private sector. Such a picture fits well with our earlier arguments on
discrimination being lower in jobs with high regulation proximity. We conclude that although the
formal-informal employment dichotomy offers a useful device to understand discrimination,
extending the framework by interacting the formal-informal employment dichotomy with the
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public-private sector dichotomy can provide us with further useful insights.
5. Conclusion
The study finds significant differences by gender and caste groups in the characteristics
of the workers in both formal and informal employment. The decomposition results at the mean
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show gender and caste-based discrimination to be significantly higher in informal employment
compared to the formally employed. Gender-based discrimination is also found to be higher than
caste-based discrimination for the formally and informally employed. The quantile
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decomposition results show discrimination to vary across the quantiles for the different labour
market segments. Studying discrimination through the public-sector vs. private-sectors
dichotomy among the formally and informally employed also offers interesting insights.
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Given the large proportion of the workforce engaged in informal employment in India,
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such large-scale wage discrimination among the informally employed needs urgent policy
attention. It points to the fact that increasing liberalisation and globalisation accompanied by the
withdrawal of the state from many sectors have been unable to lessen the discriminatory
practices in informal employment. As such the benefits of non-discriminatory regulations are

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being restricted to a small section of the workers engaged in formal employment.
Hence a blind faith in market forces may not be enough to reduce the extent of
discrimination in the economy. Urgent policy steps need to be put in place to bring the
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informally employed under the regulatory mechanism to arrest the rising trend of gender wage
discrimination (International Labour Office, 2003). We also find evidence of significantly large
wage gaps at the bottom of the wage distribution in informal employment. This calls for policy
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efforts for the legislation and strict implementation of minimum wage laws, especially in the
informal economy. Finally, steps need to be taken to improve the endowment set of the female
and SC/ST workers especially in the direction of gaining more vocational training and skills.
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Vaid, D. (2014). Caste in Contemporary India: Flexibility and Persistence. Annual Review of
Sociology, 40(1), 391–410. https://doi.org/10.1146/annurev-soc-071913-043303
Weichselbaumer, D., & Winter-Ebmer, R. (2007). The Effects of Competition and Equal
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Treatment Laws on Gender Wage Differentials. Economic Policy, 22(50), 235–287.
Weisskopf, T. E. (2010). Reflections on Globalization, Discrimination, and Affirmative Action.
In M. A. Centeno (Ed.), Discrimination in an Unequal World. New York: Oxford

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University Press.
TABLES
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Table 1: Informality rates in public and private sectors among the wage employees in non-cultivation work
1999-00 2004-05 2009-10 2011-12
31
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T
IP
Public Sector 17.13 18.32 29.98 37.41
Private Sector 82.29 87.61 87.32 87.41
CR
Note: The table shows the percentage of workers employed as informal employees in public and private sectors
among the wage employees in non-cultivation work.
Sampling weights have been used in the calculation of the results.
Source: Authors’ calculations based on NSSO data
Table 2: Descriptive Statistics

US
Informal Employment Formal Employment
Year Total Male Female SC/ST OBC/ Male Female SC/ST OBC/
Gen Gen
2004-05 27.57 29.64 34.40 100 0 20.63 19.63 100 0
% SC/ST
2011-12 28.23 30.35 33.22 100 0 20.36 21.05 100 0
2004-05 18.21 0 100 21.17 17.74 0 100 16.12 16.98
% Females
2011-12 17.53 0 100 18.52 16.60 0 100 19.03 18.40
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Mean Years of 2004-05 7.29 5.83 4.40 4.03 6.24 11.42 11.53 9.17 12.02
Education 2011-12 7.85 6.39 5.41 5.04 6.74 12.67 12.74 10.89 13.14
2004-05 34.12 31.02 33.68 31.70 31.45 40.90 37.67 40.24 40.39
Mean Age
2011-12 35.26 33.48 35.47 33.84 33.81 40.07 37.25 39.71 39.50
2004-05 989.1 718.3 745.3 567.9 791.9 1620.3 1660.3 1042.9 1777.4
Mean MPCE
2011-12 1991.4 1549.9 1672.3 1265.7 1207.1 3141.3 3656.2 2430.9 3444.3
2004-05 4.51 4.22 3.67 4.00 4.17 5.45 5.13 5.20 5.45
Mean of Log Wages
2011-12 5.35 5.13 4.62 4.95 5.09 6.25 5.99 6.01 6.25
DM
Unionization Rates 2004-05 25.05 7.91 6.02 5.81 8.32 67.59 64.58 73.29 65.48
(%) 2011-12 19.33 7.88 6.67 6.56 8.17 54.38 51.85 59.21 52.55
2004-05 55870 27856 6941 10747 24037 17557 3516 6101 14956
No. of Observations
2011-12 55094 29453 6407 11513 24347 15824 3410 5862 13372
Note: Sampling weights have been used in the calculation of the estimates.
Table 3: Oaxaca-Blinder Decomposition results by gender

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1999-00 2004-05 2009-10 2011-12 1999-00 2004-05 2009-10 2011-12
a
Overall Wage Gap 0.588 0.552a 0.506a 0.510a 0.230a 0.318a 0.282a 0.261a
Controlling for observables and self-selection (Lee method)
Explained Wage Gap 0.095a 0.001 -0.095a -0.085a 0.056a 0.114a 0.110a 0.139a
a a a
Unexplained Wage Gap 0.493 0.552 0.602 0.595a 0.174a 0.204a 0.172a 0.122a
Controlling for observables and self-selection (Heckman method)
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Explained Wage Gap 0.075a -0.027c -0.099a -0.083a 0.023 0.077a 0.091b 0.134a
a a a
Controlling for observables only (without selection bias correction)
Explained Wage Gap 0.149a 0.117a 0.059a 0.044a 0.030a 0.063a 0.021c 0.047a
a a a
C
Note: Significance levels are denoted by c 10%, b 5%, a 1%.
32
AC
T
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Sampling weights have been used in the calculation of the estimates.
Wage gaps refer to male wages minus female wages in case of gender-based discrimination and General/OBC
CR
wages minus SC/ST wages in case of caste-based discrimination.
Table 4: Oaxaca-Blinder Decomposition results by caste

1999-00 2004-05 2009-10 2011-12 1999-00 2004-05 2009-10 2011-12
a
Overall Wage Gap 0.173 0.169a 0.189a 0.138a 0.170a 0.256a 0.276a 0.249a
US
Controlling for observables and self-selection (Lee method)
Explained Wage Gap 0.112a 0.050a 0.102a 0.070a 0.192a 0.241a 0.245a 0.242a
a a a
Unexplained Wage Gap 0.061 0.119 0.088 0.068a -0.022 0.015 0.031 0.007
Controlling for observables and self-selection (Heckman method)
a a a
Unexplained Wage Gap 0.058 0.119 0.088 0.063a -0.063a -0.034 -0.012 -0.047c
Controlling for observables only (without selection bias correction)
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a a a
Unexplained Wage Gap 0.033 0.082 0.066 0.036a 0.001 0.051a 0.054b 0.038b
See Notes in Table 3.
Table 5: Gender discrimination across quantiles

DM
Quantil 10th 30th 50th 70th 90th 10th 30th 50th 70th 90th
e
Unexplained 1999-00 0.45a 0.48a 0.48a 0.39a 0.40a 0.88a 0.13a 0.02 0.04b 0.11a
a a
Wage Gap 2004-05 0.58 0.40 0.38a 0.42a 0.38a 0.78a 0.26a 0.12a 0.04b 0.16a
2009-10 0.73a 0.52a 0.38a 0.35a 0.44a 0.55a 0.29a 0.15a 0.04c 0.11a
a a
2011-12 0.69 0.39 0.50a 0.41a 0.47a 0.48a 0.41a 0.13a 0.08a 0.05c
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Table 6: Caste-based discrimination across quantiles

Quantil 10th 30th 50th 70th 90th 10th 30th 50th 70th 90th
e
Unexplained 1999-00 0.10a -0.07a -0.05a 0.01 0.07a -0.05 -0.02 -0.01 0.03c 0.08a
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a
Wage Gap 2004-05 0.03 0.09 0.02 0.06a 0.20a 0.31a 0.02 0.08a 0.03c 0.07a
2009-10 0.03 0.09a 0.08a 0.07a 0.01 -0.11 0.04 0.06a 0.05a 0.02
2011-12 0.03 0.04b -0.06a -0.05a 0.06a 0.18b 0.01 0.02 0.04b 0.06b
C
Table 7: Discrimination across sectors in formal and informal employment
33
AC
T
IP
1999-00 2004-05 2009-10 2011-12 1999-00 2004-05 2009-10 2011-12
CR
Gender-based discrimination
Private sector 0.48a 0.55a 0.59a 0.59a 0.27b 0.26a 0.17c 0.12c
Public sector 0.78a 0.60a 0.67a 0.64a 0.09b 0.15a 0.17a 0.12a
a
Difference -0.30 -0.04 -0.08 -0.05 0.18b 0.11 0.001 -0.001
Caste-based discrimination
Private sector 0.05a 0.12a 0.09a 0.07a -0.05 0.08b 0.1 0.06
a a
Public sector 0.27 0.14 0.07c 0.02 -0.01 -0.01 0.001 -0.02
US
b
Difference -0.22 -0.02 0.02 0.05 -0.04 0.09b 0.10b 0.08c
Standard errors are clustered on state/province level
FIGURES
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Figure 1: Simultaneous decision process of the worker

Informal Male Wage Employed Formal Male Wage Employed
Informal Female Wage Employed Formal Female Wage Employed

Participation decision
choices (Model 1)
choices (Model 2)
Formal Wage Employed Informal Wage Employed

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Cultivators Cultivators
Self-Employment Self-Employment
Outside the workforce Outside the workforce
Not Matching Not Matching
Informal Gen/OBC Wage Employed Formal Gen/OBC Wage Employed

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Informal SC/ST Wage Employed Formal SC/ST Wage Employed

choices (Model 3)
choices (Model 4)
Formal Wage Employed Informal Wage Employed
Cultivators Cultivators
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Self-Employment Self-Employment
Outside the workforce Outside the workforce

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Not Matching Not Matching
34
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T
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Note: The ‘Not Matching’ category includes the set of wage-employed in whose case the usual status codes, 5-digit
NIC codes or 3-digit NCO codes are not the same for the 365-day and seven-day recall period. See Section 3.1 for
CR
further details.
Model 1 and 2 shows the choices in the participation decision in case of gender-based discrimination in
informal and formal employment respectively. Similarly, Model 3 and 4 shows the choices in the participation
decision in case of caste-based discrimination in informal and formal employment respectively.
The above classification of workers into different activity status is based on the 365-day recall period.
Source: Authors calculations
US
Figure 2: Gender and caste-based discrimination across quantiles in formal and informal employment
AN
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Source: Authors’ calculations based on NSSO data.

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Accepted manuscript to appear in SER

Author(s): Bhaskar Jyoti Neog, Bimal Kishore Sahoo

Received: 18 July 2018

Accepted: 13 February 2019

Link to final version: https://doi.org/10.1142/S021759081950019X

Blinder decomposition results corrected for self-selection show wage discrimination to be

significantly higher in informal employment compared to the formally employed. Similarly,

caste-based discrimination is found to be lower compared to gender-based discrimination. The

Keywords: Gender; Caste; Discrimination; Decomposition; Quantile; Informal; Regulation.

JEL: J31, J38, J71, J78.

accompanied by rising socio-economic inequalities (Ahluwalia, 2011; Subramanian & Jayaraj,

particular workers are regulated, including by collective agreements, legislation or other

discrimination and more equal outcomes (Becker, 1957; Neetha, 2014).

bargaining processes are completely absent in informal employment; and it is mainly

and burgeoning size of the informal workforce.

concludes the study and makes some policy prescriptions.

high and low productivity workers (Arrow, 1971; Phelps, 1972).

Theoretical perspectives on discrimination outside the mainstream economics have

resources away from out-of-group members (Blumer, 1958).

The existing theoretical understanding of the relationship between liberalisation and

effect of liberalisation on discrimination.

rise with increasing competition in the labour market.

is an ongoing debate on the impact of globalisation on discrimination (Weisskopf, 2010),

extent of caste-based discrimination, though significant, is found to be significantly smaller than

discrimination in the formal (or regular) jobs in India.

3. Data and Methodology

3.1. Data Description

available for such workers.

We perform the decomposition methodology proposed by Oaxaca (1973) and Blinder

characteristics (Fortin, Lemieux, & Firpo, 2011).

proposed by Lee (1983) to correct for possible selection on unobservables.

sector is chosen, 𝑗 = 1,2, . . 𝑘.

𝐸(𝑤𝑖 ⎸𝐷 = 𝑗) = 𝑥𝑖 𝛽 + 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) … … . (2)

Here, 𝑤𝑖 represents wage earnings, 𝑥𝑖 is a vector of covariates and 𝛽 is the corresponding

coefficient vector. 𝑢𝑖 represents the error term.

the 𝐸(𝑢𝑖 ⎸𝐷 = 𝑗) as an additional regressor in our wage function.

Hence, our corrected wage function becomes,

choice of the workers.

[Insert Figure 1 here]

Accordingly, our conditional wage function is given by,

The selection corrected wage regression is given by,

𝐸(𝑢𝑖 ⎸𝐵 𝑗 = 1) and computed following Heckman (1979).

dummy variables to derive a third selection instrument.

𝑙𝑛𝑤𝑖𝑙 = 𝑋𝑖𝑙′ 𝛽 𝑙 + 𝜆𝑙𝑖 𝛿 𝑙 + 𝑢𝑖𝑙 … … . (6)

Square (OLS) method.

Now, 𝐸(𝑙𝑛𝑤𝑖𝑙 ) = 𝑋𝑖𝑙′ 𝛽 𝑙 + 𝜆𝑙𝑖 𝛿 𝑙 … … . (7), since 𝐸(𝑢𝑖𝑙 ) = 0 by definition.

coefficient vector is 𝛽 ∗𝑙 which includes 𝛿 𝑙 in addition to 𝛽 𝑙 .

Accordingly, Eq. (7) can be written as,

Replacing the expected values of covariates by sample averages, we have,

additional regressor, so that our expression for decomposition becomes,

unexplained wage gap4.

quintile) (Firpo, Fortin, & Lemieux, 2009).

2009; Fortin et al., 2011).

3.3. Variable Description

group (consisting of General castes) taking it as the reference category.

The impact of religion on informality is explored by including separate dummies for

‘manufacturing’; ‘construction’; ‘community, social & personal services’; and ‘finance,

Further, using a methodology proposed in Ministry of Labour and Employment (Ministry

4.1. Descriptive Statistics

[Insert Table 2 here]

4.2. Decomposition Results

instruments significantly influence the participation decision. Additionally, as discussed in

unexplained and is attributable to the discrimination effect whereas in formal employment,