Wages and Informal Labour Markets in India: Whither Premiums on Human Capital Investments?-The Indian Journal of Labour Economics

The labour market in India is segmented into the formal and informal sectors, with the informal sector being further heterogeneous. This study estimates the returns to education in different segments of the labour market in urban India by using primary data collected in two cities—Delhi and Ranchi. We estimate the standard Mincerian wage function for the formal and informal sector segments by controlling for possibilities of endogenous employment in a particular sector. The results from OLS as well as switching regression indicate that the returns increase with the level of education and that they are almost double in the formal sector. Using quantile regressions, we noted that the returns to education are significantly different across the wage distribution in the informal sector, but not in the formal sector. Workers having acquired graduate level of education in the formal sector obtain similar returns across the wage distribution, but those who are not able to enter the formal sector and remain in the informal sector face differential returns across the wage distribution, being higher at the higher end of the income distribution. Given the limits to the entry into the upper segments of the informal sector wherein the returns are higher, we hypothesise that individuals would be less willing to invest in human capital. The nature of poor quality educational institutions that such individuals are able to access would deter them further. Thus, exclusion and marginalisation affect the workers’ capacity to negotiate the labour market.

This article is part of a special issue on informal employment in China and India with special editors, Jeemol Unni and Alakh N. Sharma.