Segmentation and informality in the Indian labour market

The present study investigates the hypothesis of labour market segmentation in the Indian labour market along the lines of formal and informal employment. The study uses Employment-Unemployment survey data from the National Sample Survey Organization (NSSO) for the four rounds from 1999–00 to 2011–12. Oaxaca-Blinder decomposition method corrected for selection bias is used to analyse wage gaps between the formal and informal employees. The results lend credible support in favour of the labour market segmentation hypothesis. The study finds significant wage gap between the formal and the informal sectors which cannot be explained entirely due to the differences in endowments of workers. The extent of discrimination is seen to rise over the period 1999–00 to 2009–10 before declining marginally in 2011–12. Decomposition analysis along the quantiles demonstrates the discrimination effect to be smaller in the lower quantiles compared to the higher quantiles. Alternative semi-parametric methods applied to check for the robustness of the results support the segmented labour market hypothesis.