Summary
In developing countries such as that of Sri Lanka, the labour market is segmented into different sectors with different earnings potential. The highest earnings tend to be in employment in the public sector and the formal private sector. Self-employment can pay well, particularly for men, if workers are successful. The lowest pay tends to be in agriculture and in the informal non-agricultural sector. However, analysing these pay differentials is complicated by selectivity: workers are not randomly assigned across sectors. High pay may sometimes be the result of unobserved differences in the ability of workers, rather than structural differences in returns to labour between sectors. Likewise, when trying to see if the returns to labour differ across sectors, allowance needs to be made for the potential endogeneity of education – higher ability workers may receive more education.
In this Nottingham School of Economics working paper Nirodha Bandara, Simon Appleton and Trudy Owens attempt to estimate pay gaps and returns to education across different sectors in Sri Lanka, allowing for both the selectivity of employment and the endogeneity of education. Using the Labour Force Survey 2013, the determinants of sector choice are analysed using a multinomial logit. The findings of this paper suggest that individuals with the highest levels of education get into the public and formal private sectors, whereas the least educated are likely to join the informal and agricultural sectors. The earnings functions suggest that the returns to education vary greatly across the sectors. The differences across sectors confirm the importance of disaggregating the sectors of employment to examine choices of labour force participation.
CREDIT discussion paper 18/09: Sectoral choice and selectivity, by Nirodha Bandara, Simon Appleton and Trudy Owens.
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Authors
Nirodha Bandara, Simon Appleton and Trudy Owens
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Posted on Friday 6th July 2018