Wage differential between formal and informal employment in Nepal

Abstract

This research investigates the wage gap between formal and informal employment in Nepal using data from the Nepal Labor Force Survey (NLFS) III. We employ OLS regressions and Oaxaca-Blinder decomposition to examine the influence of various factors, such as education, experience, occupation, firm size, and sector of employment, on wages in formal and informal employment. Our findings indicate that formal workers earn higher wages and that the wage gap between formal and informal employment is significant, with informal workers earning approximately 64.77% less than formal workers. Additionally, we find that informality is correlated with lower wages and that factors such as occupation class, firm size, and sector of employment all have a significant impact on wages in informal employment. The results of this study suggest that policies aimed at formalizing informal employment and enhancing the skills and education of informal workers could reduce the wage gap and improve economic security for informal workers in Nepal.