10
Within the workers that have a written contract, the proportion of those with an open- ended contract has been declining during the past decade. There is anecdotal evidence that
when workers with an open-ended contract retire, or they are fired, they are substituted by workers with a fixed-term contract.
2.6. Labour market segmentation
One way of determining whether a labour market is segmented is to study the relative sizes and returns to the formal and informal sector. Fiess et al 2005 develop a theoretical
model to analyze labour market segmentation between two sectors. Their results suggest that in the absence of segmentation, the time series of the size and earnings of two sectors
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should move in the same direction. In this case, informal-sector employment would be associated with a voluntary choice. However, if the time series move in opposite directions
it is seen as a sign that the labour market is segmented because this suggests restrictions to the mobility between sectors and involuntary transitions into the informal sector.
Figure 6 portrays the evolution of the relative sizes and earnings of the formal and informal sectors in Colombia between 1984 and 2012. The evolution of relative earnings is
very telling. Formal-sector earnings were around 1.5 of informal-sector earnings until the mid 90’s when they started to increase. They fluctuated around 2.3 of informal-sector
earnings between 2003 and 2012. There is evidence of segmentation starting in 1993, probably because of the negative effects of Law 100 of 1993, which increased NWCs
dramatically. The fact that the relative sizes and earnings in both sectors move in the opposite direction implies that both segments act as substitutes rather than as complements.
Therefore, belonging to the informal worker is the result of market exclusion rather than an employee´s choice.
During the crises period, between 1997 and 2000, we find the starkest decrease in relative wages paired with the biggest increase in relative employment. However, this trend
has been smoothed in the last years, due to the recovery of the Colombian economy and the overcoming of the institutional breakdown of the 90´s.
An alternative way of analyzing whether a labour market is segmented is to study the transition between the formal and informal sectors. If transitioning between the formal and
informal sectors was easy, working in the informal sector could be interpreted as a desirable alternative. However, if transitions are not easy, informal workers may be trapped in the
disadvantaged sector in a dual labour market.
We now describe the analysis performed in Mondragón-Vélez et al 2010 of the worker flows between the formal and informal sectors. To date, there are no panel surveys
in Colombia that can be used to follow workers and their decisions to switch job andor sectors. The Household Survey is a repeated cross-section. Using retrospective questions,
such as job tenure and the duration of the unemployment spell between the previous and the current job, and the firm size and occupation in the previous job, we build the transitions
within 12-month periods. The only definition of informality that can be built for the previous job is the official definition, based on firm size and occupation; there is no
information on contributions to health insurance or pensions for the previous job. The analysis is restricted to workers who switched jobs during the previous year.
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The authors develop their model with a tradable and non-tradable sector, but the idea can also be applied to the formal and informal sector.
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Figure 6 Relative size and earnings between wage earners and the self-employed
.7 .9
1.1 1.3
1.5 1.7
1.1 1.3
1.5 1.7
1.9 2.1
2.3 2.5
19 84
19 85
19 86
19 87
19 88
19 89
19 90
19 91
19 92
19 93
19 94
19 95
19 96
19 97
19 98
19 99
20 00
20 01
20 02
20 03
20 04
20 05
20 06
20 07
20 08
20 09
20 10
20 11
Year Relative Employment
Left Axis Relative Earnings
Right Axis
Relative Size and Earnings between Wage Earners and the Self-Employed
Source: Departamento Nacional de Planeación, 2013
Figure 7 Transitions between the formal and informal sectors
Percentage of total job change right axis
Source: Mondragón-Vélez et al 2010
We present information on the transitions between sectors for the period 1986 to 2006. The total number of workers that switch jobs in a given year are divided into 4 categories:
those who were formal, and remained formal, those who were informal and remained informal, those who were formal and became informal and those who transitioned from
informality to formality. The percentages of each of these 4 flows add up to 1. The left panel of Figure 7, shows the percentage of workers who changed jobs in the previous year,
but remained in the same sector they started in: the persistence of the sectors. The solid line captures the percentage of informal workers who remained informal. In 1986 this
percentage was above 40 per cent, it decreased to 35 per cent in 1995, and then increased again, remaining in the 40
– 45 per cent range between 1998 and 2006. The dashed line captures the persistence of the formal sector. The persistence in the formal sector has the
opposite behaviour. It was about 27 per cent in 1986, and it increased to 35 per cent 1995, to then decrease again and fluctuate roughly between 25 per cent and 30 per cent.
25 30
35 40
45
1994 1996
1998 2000
2002 2004
2006 Year
Remained informal Remained formal
12 14
16 18
20
1994 1996
1998 2000
2002 2004
2006 Year
Became informal Became formal
